Question

Dahlia Colby, CFO of Charming Florist Ltd., has created the firm’s pro forma balance sheet for the next fiscal year. Sales are projected to grow by 20 percent to $420 million. Current assets, fixed assets, and short-term debt are 25 percent, 70 percent, and 15 percent of sales, respectively. Charming Florist pays out 25 percent of its net income in dividends. The company currently has $128 million of long-term debt and $56 million in common stock par value. The profit margin is 16 percent.

  

a. Prepare the current balance sheet for the firm using the projected sales figure. (Be sure to list the assets and liabilities in order of their liquidity. Enter your answers in dollars, not millions of dollars, e.g.,1,234,567. Do not round intermediate calculations and round your answers to the nearest whole number, e.g., 32.)

b.

Based on Ms. Colby’s sales growth forecast, how much does Charming Florist need in external funds for the upcoming fiscal year? (Enter your answer in dollars, not millions of dollars, e.g., 1,234,567. Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)

  

  

c-1.

Prepare the firm’s pro forma balance sheet for the next fiscal year. (Be sure to list the assets and liabilities in order of their liquidity. Enter your answers in dollars, not millions of dollars, e.g., 1,234,567. Do not round intermediate calculations and round your answers to the nearest whole number, e.g., 32.)

  

  

c-2.	Calculate the external funds needed. (Enter your answer in dollars, not millions of dollars, e.g., 1,234,567. Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)

Answer 1

a) Current sales = Expected sales / (1 + growth) = $420 million / (1 + 20%) = $350 million

Balance Sheet

Assets	Amount	Liabilities and Equity	Amount
Current assets (350 x 25%)	87,500,000	Short - term debt (420 x 15%)	63,000,000
Fixed assets (350 x 70%)	245,000,000	Long - term debt	128,000,000
		Common stock	56,000,000
		Accumulated retained earnings (balancing figure)	85,500,000
		Total Equity	141,500,000
Total Assets	332,500,000	Total Liabilities and equity (=Total assets)	332,500,000

b) External financing needed (EFN) can be computed using the following equation -

EFN = [ (Assets / Sales) x Change in sales ] - [ (Debt / Sales) x Change in sales ] - [ (Profit margin x expected sales) x (1 - dividend payout ratio) ]

Debt here means short - term debt as that will vary with sales and long - term debt will not.

Expected sales = 420,000,000

Change in sales = 420,000,000 - 350,000,000 = 70,000,000

EFN = [ (332,500,000 / 350,000,000) x 70,000,000 ] - [ (63,000,000 / 350,000,000) x 70,000,000 ] - [ (16% x 420,000,000) x (1 - 0.25) ]

or, EFN = 66,500,000 - 12,600,000 - 50,400,000 = 3,500,000

c-1) Addition to retained earnings = Expected sales x profit margin x (1 - dividend payout ratio) = $420,000,000 x 16% x (1 - 0.25) = $50,400,000

Pro forma Balance Sheet

Assets	Amount	Liabilities and Equity	Amount
Current assets (87,500,000 + 20%)	105,000,000	Short - term debt (63,000,000 + 20%)	75,600,000
Fixed assets (245,000,000 + 20%)	294,000,000	Long - term debt	128,000,000
		Common stock	56,000,000
		Accumulated retained earnings (85,500,000 + 50,400,000)	135,900,000
		Total Equity	191,900,000
Total Assets	399,000,000	Total Liabilities and equity	395,500,000

c-2) EFN = Total assets - Total liabilities and equity = 399,000,000 - 395,500,000 = 3,500,000