Using the following income statement, balance sheet and additional information complete the tasks mention below.

Income Statement

Sale

4,200

Operating costs

3,780

EBIT

420

Interest

120

EBT

300

Taxes (40%)

120

Net Income

180

Dividends

0

Addition to retrained earnings

180

Balance Sheet

Cash and marketable securities

42

Accounts receivable

336

Inventories

441

Current Assets

819

Net fixed assets

2,562

Total Assets

3,381

Accounts payable and accruals

168

Notes payable

250

Current liabilities

418

Long term debt

700

Common stock

400

Retained earnings

1863

Total liabilities and equity

3,381

In developing its forecast for the upcoming year, the company has assembled the following information:

Sales are expected to increase 8 % this upcoming year.

Operating costs are expected to remain at 90% of sales.

Cash and marketable securities are expected to remain at 1% of sales

Accounts receivable are expected to remain at 8% of sales

Due to excess capacity the company expects that its year end inventories will remain at current levels.

Fixed assets are expected to remain at 61% of sales

Spontaneous liabilities (accounts payable and accruals) are expected to increase at the same rate as sales.

The company will continue to pay a zero dividend, and its tax rate will remain at 40%.

The company anticipates that any additional funds needed will be raised in the following manner: 25% notes payable, 25% long-term debt, and 50% common stock.

Task:

1. Based on the assumptions listed above, construct Pro forma income statement and balance sheet. Assume that there are no financial feedback effects. (That is assume interest will remain unchanged even though the company may increase its debt).

2. Based upon this forecast, describe changes from the prior year that should expect in its return on equity, inventory turnover ratio and profit margin.