Question
Veneer Corporation has a competitive advantage in contract manufacturing of small electrical components and expects their competitive advantage to last two years through calendar 2021.
Veneer Corporation has a competitive advantage in contract manufacturing of small electrical components and expects their competitive advantage to last two years through calendar 2021. The competitive advantage will allow it to increase sales by 20% annually for 2020 and 2021, and, after that, its sales will grow at the same rate as the increase in nominal GDP.
Prepare a proforma income statement, balance sheet, and firm free cash flow for Veneer for 2020 and 2021 (the planning period) using the following assumptions:
- Sales are expected to grow by 20% annually.
- Cost of goods sold and operating expenses are a constant percent of revenues, interest is 5% of Beginning of Year (BOY) long-term debt plus short-term debt, depreciation is 10% of BOY total fixed assets (gross, not net) and income taxes are 35% of income before tax.
- The projected cash balances will change to balance the balance sheet, and the remaining current assets increase in proportion to sales.
- Gross fixed assets increase 5% each year.
- Accounts payable increases in proportion to sales.
- Short-term debt remains the same each year of the planning period. Long-term debt is payable, beginning at the end of the year 2020 and continuing at the end of each year, in equal annual principal payments of $540.
- Retained earnings increases by net income and decreases by dividends. The dividend payout ratio is 25%.
- During 2021, capital stock with a par value of $1 per share will be sold for $1 per share or a total of $500. There are no other sales of capital stock.
Veneer's Balance Sheet and Income Statement for 2018 and 2019 is shown below:
Veneer Corporation | |||||||
Balance Sheets | |||||||
December 31, 2018 and 2019 | |||||||
Historical | |||||||
ASSETS | 2018 | 2019 | |||||
Current Assets: | |||||||
Cash | 368 | 1,823 | |||||
Accounts receivable | 1,622 | 1,599 | |||||
Inventories | 544 | 590 | |||||
Total Current Assets | 2,534 | 4,012 | |||||
Fixed Assets | |||||||
Total Fixed Assets (Gross) | 7,800 | 8,474 | |||||
Accumulated depreciation | (580) | (730) | |||||
Net Fixed Assets | 7,220 | 7,744 | |||||
TOTAL | 9,754 | 11,756 | |||||
LIABILITIES AND SHAREHOLDERS' EQUITY | |||||||
Current Liabilities: | |||||||
Accounts payable | 370 | 512 | |||||
5% Short-term debt | 1,800 | 2,288 | |||||
Total Current Liabilities | 2,170 | 2,800 | |||||
5% Long-term debt | 5,070 | 5,392 | |||||
Shareholders' Equity: | |||||||
Common stock | 1,000 | 1,000 | |||||
Additional paid-in capital | 2,000 | 2,000 | |||||
Retained earnings | (250) | 797 | |||||
Total | 2,750 | 3,797 | |||||
Treasury stock | (233) | (233) | |||||
Total Shareholders' Equity | 2,517 | 3,564 | |||||
TOTAL | 9,757 | 11,756 | |||||
Statements of Income | |||||||
Historical | |||||||
2018 | 2019 | ||||||
Revenues | 16,389 | 18,210 | |||||
Cost of goods sold | 10,832 | 12,035 | |||||
Gross profit on sales | 5,558 | 6,175 | |||||
Operating expenses | 3,521 | 3,912 | |||||
Depreciation | 150 | 150 | |||||
EBIT | 1,887 | 2,113 | |||||
Interest expense | 603 | 502 | |||||
Income Taxes | 449 | 564 | |||||
Net Income | 834 | 1,047 |
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