Topeka Industries has approached you about a new long-term loan in the amount of $12 million. The loan would be issued at the beginning of 2018, and the firm's existing debt (notes payable and long-term debt) would be repaid. The new loan would have an 8-year term, with annual pay down requirements of $1.5 million. The first repayment installment would be made at the end of 2018. The interest rate on the loan would be 7 percent.

1. Using these projections, complete pro forma income statements and balance sheets for Topeka Industries.

2. On the basis of the pro forma results, would you make a loan to Topeka?

Topeka's management has provided you with the following projections for 2018-2021: 2021 20 35 2018 30 37 20 7.5 10 6.0 25 L 7.5 Sales growth rate (%) Gross margin (%) Increase in SG&A (%) Depreciation (% of sales) Cap. Exp. (% of sales) Inventory Turns DSO DPO Accruals (% of sales) Cash (% of sales) Dividends (% of net income) | 10 2019 30 36 20 7.5 10 6.5 25 8 1.5 2.5 10 2020 25 35 10 7.5 10 7.0 23 9 1.5 7.0 23 10 7 1.5 1.5 2.5 2.5 2.5 10 10 10 Income Statements 2015 2016 2017 Net Sales Cost of Goods Sold Gross profit SG&A Depreciation EBIT Interest Expense Earnings before taxes Taxes (40%) Net income $28,255,000 16,741,100 11,513,900 5,580,350 2.775,000 3,158,550 378,000 2,780,550 1,112,220 $ 1,668,330 $37,340,000 24,084,300 13,255,700 8,028,100 2,915,000 2,312,600 482,590 1,830,010 7 32,004 $ 1,098,006 $54,670,000 35,672,175 18,997,825 11,890,725 3,513,000 3,594,100 641,269 2,952,831 1,181,132 $ 1,771,699 Balance Sheets 2015 2016 2017 Assets Cash Accounts receivable Inventories Current assets Gross fixed assets Accumulated depreciation Net fixed assets Total assets $ 856,000 $ 968,000 $ 1,225,000 2,225,000 2,525,000 3,758,000 3,850,000 4,950,000 6,013,000 6,931,000 8,443,000 10,996,000 18,875,000 22,491,000 28,996,000 (5,000,000) (7,915,000) (11,428,000) 13,875,000 14,576,000 17,568,000 $ 20,806,000 $ 23,019,000 $28,564,000 Liabilities & Shareholders' Equity Accounts payable Accruals Notes payable Current liabilities Long-term debt Common stock Retained earnings Total liabilities & shareholders' equity $ 425,000 495,000 150,000 1,070,000 5,250,000 11,800,000 2,686,000 $ 20,806,000 $ 478,000 $ 518,000 567,000 694,000 180,000 175,000 1,225,000 1,387,000 6,714,140 8,985,980 11,450,000 12,950,000 3,629,8605,241,020 $ 23,019,000 $28,564,000 Topeka's management has provided you with the following projections for 2018-2021: 2021 20 35 2018 30 37 20 7.5 10 6.0 25 L 7.5 Sales growth rate (%) Gross margin (%) Increase in SG&A (%) Depreciation (% of sales) Cap. Exp. (% of sales) Inventory Turns DSO DPO Accruals (% of sales) Cash (% of sales) Dividends (% of net income) | 10 2019 30 36 20 7.5 10 6.5 25 8 1.5 2.5 10 2020 25 35 10 7.5 10 7.0 23 9 1.5 7.0 23 10 7 1.5 1.5 2.5 2.5 2.5 10 10 10 Income Statements 2015 2016 2017 Net Sales Cost of Goods Sold Gross profit SG&A Depreciation EBIT Interest Expense Earnings before taxes Taxes (40%) Net income $28,255,000 16,741,100 11,513,900 5,580,350 2.775,000 3,158,550 378,000 2,780,550 1,112,220 $ 1,668,330 $37,340,000 24,084,300 13,255,700 8,028,100 2,915,000 2,312,600 482,590 1,830,010 7 32,004 $ 1,098,006 $54,670,000 35,672,175 18,997,825 11,890,725 3,513,000 3,594,100 641,269 2,952,831 1,181,132 $ 1,771,699 Balance Sheets 2015 2016 2017 Assets Cash Accounts receivable Inventories Current assets Gross fixed assets Accumulated depreciation Net fixed assets Total assets $ 856,000 $ 968,000 $ 1,225,000 2,225,000 2,525,000 3,758,000 3,850,000 4,950,000 6,013,000 6,931,000 8,443,000 10,996,000 18,875,000 22,491,000 28,996,000 (5,000,000) (7,915,000) (11,428,000) 13,875,000 14,576,000 17,568,000 $ 20,806,000 $ 23,019,000 $28,564,000 Liabilities & Shareholders' Equity Accounts payable Accruals Notes payable Current liabilities Long-term debt Common stock Retained earnings Total liabilities & shareholders' equity $ 425,000 495,000 150,000 1,070,000 5,250,000 11,800,000 2,686,000 $ 20,806,000 $ 478,000 $ 518,000 567,000 694,000 180,000 175,000 1,225,000 1,387,000 6,714,140 8,985,980 11,450,000 12,950,000 3,629,8605,241,020 $ 23,019,000 $28,564,000