Suppose that in 2014 sales increase by 10% over 2013 sales and that 2014 dividends will increase to $112,000. Forecast the financial statements using the forecasted financial statement method. Assume the firm operated at full capacity in 2013. Use an interest rate of 13%, and assume that any new debt will be added at the end of the year (so forecast the interest expense based on the debt balance at the beginning of the year). Cash does not earn any interest income. Assume that the all new debt will be in the form of a line of credit.

I put the solution up so it can be used as a reference to solve the problems for the questions that I have below.

Operating Cost 3,607,692 (What was multiplied or divided by to get this answer)

EBIT 352,308 (What was multiplied or divided by to get this answer)

Debt 20,280 (What was multiplied or divided by to get this answer)

Taxes 132,811 (What was multiplied or divided by to get this answer)

Addition to RE 87,217 (What was multiplied or divided by to get this answer)

Income Statement for December 31, 2013 Sales $3,600,000 Operating costs 3,279,720 EBIT $ 320,280 Interest 18,280 Pre-tax earnings $ 302,000 Taxes (40%) 120,800 Net income $ 181,200 Dividends $ 108,000

Balance Sheet as of December 31, 2013 Cash $ 180,000 Accounts payable $ 360,000 Receivables 360,000 Notes payable 156,000 Inventories 720,000 Line of credit 0 Total current assets $1,260,000 Accruals 180,000 Fixed assets 1,440,000 Total current liabilities $ 696,000 Common stock 1,800,000 Retained earnings 204,000 Total assets $2,700,000

Total liabilities and equity $2,700,000

Forecast 1st Pass AFN 2nd Pass 2009 Basis Additions 2010 Effects 2010 $3,960,000 Sales Operating costs EBIT Interest EBT Taxes (40%) Net income 01 $3,960,000 3.279720 $320,280 20 280 300,000 0.911x Saleso2 3,607,692 3,607692 $ 352,308 $ 332,028 132,811 199,217 $ 352,308 20 280 +8,37128,651 $ 323,657 129 463 $ 194,194 120,000 Dividends: $1.08 x 100,000 = $108,000 Addition to RE: $ 72,000 $ 112,000* +3,005115,005 $ 87,217 79,189 Preliminary 2002 Dividends $1.12 x 100,000 = $112,000 Interest= $64,392/ 0.13= $8,371 2002 Dividends $64,391/$24 x 1.12 = $3,005. Addition to RE = $79.189-$87,217--$8,028. Pro Forma Balance Statement