The financial statements for Hotwire Inc. (are provided below). Although the company has not been growing, it now plans to expand and will increase net fixed assets to match the increase in sales. 

• Hotwire forecasts that the ratio of Revenues to total assets will remain at 1.5

 • Net working capital will equal 50% of the end of year net fixed assets 

• Annual depreciation is 10% of net fixed assets at the start of the year 

• Fixed Costs are expected to remain at $176,000 and variable costs at 70% of revenue. 

• The company’s policy is to pay out 2/3 of its net income as dividends 

• Maintain a Debt Ratio of 25% of total assets (eg $1,500 x 25% = $375 Debt) 

• Revenues are expected to increase by 15% in 2021 

REQUIRED:

 i) Prepare a Pro-forma Income Statement and Balance Sheet for 2021. 

 ii) Now assume that the balancing item is debt and that no equity is to be issued. Prepare the Liabilities and Equity portion of the Pro-forma Balance Sheet for 2021. What is the projected debt ratio for 2021? 

Hotwire Inc. Income Statement for year-ended December 31, 2020 ($000’s) 

Revenue $2,250 

Fixed Costs 176 

Variable Costs (70% of revenue) 1,575

 Depreciation 100 

Interest (8% of begin yr. debt) 30 

Taxable income 369 Taxes @ 40% 111 

Net income $ 258 

Dividends 172 

Addition to retained earnings 86 Balance Sheet As at Dec 31, 2020 

Assets 

Net working capital $ 500 

Net fixed assets 1,000 net of depreciation) 

Total assets $1,500 

Liabilities and shareholder’s equity Debt $ 375 

Shareholder’s Equity 1,125 

Total Liabilities and Shareholder’s Equity $1,500