The balance sheet of the Boyd Trucking Company (BTC) shows that BTC had sales for the year

Question:

The balance sheet of the Boyd Trucking Company (BTC) shows that BTC had sales for the year ended December 31, 2015, of $25 million. The firm follows a policy of paying all net earnings out to its common stockholders in cash dividends. Thus, BTC generates no funds from its earnings that can be used to expand its operations. (Assume that depreciation expense is just equal to the cost of replacing worn-out assets.)

Boyd Trucking Company Balance Sheet, December 31, 2015 ($ Millions)

Current assets.................$10..................Accounts payable...............$ 5

Net fixed assets................15......................Notes payable..................0

Total...........................$25......................Bonds payable.................10

..........................................................Common equity.................10

..........................................................Total.............................$25

a. If BTC anticipates sales of $40 million during the coming year, develop a pro forma balance sheet for the firm as of December 31, 2016. Assume that current assets vary as a percent of sales, net fixed assets remain unchanged, and accounts payable vary as a percent of sales. Use notes payable as a balancing entry.

b. How much "new" financing will BTC need next year?

c. What limitations does the percent of sales forecast method suffer from? Discuss briefly.

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