Question

Consider the following income statement for the Heir Jordan Corporation:

  

HEIR JORDAN CORPORATION Income Statement
Sales					$	47,000
Cost						31,300
Taxable income					$	15,700
Taxes (35%)						5,495
Net income					$	10,205
Dividends	$	2,500
Addition to retained earnings		7,705

  

The balance sheet for the Heir Jordan Corporation follows.

  

HEIR JORDAN CORPORATION Balance Sheet
Assets				Liabilities and Owners’ Equity
Current assets				Current liabilities
Cash	$	2,950		Accounts payable	$	2,400
Accounts receivable		4,100		Notes payable		5,400
Inventory		6,400		Total	$	7,800
Total	$	13,450		Long-term debt	$	28,000
				Owners’ equity
Fixed assets				Common stock and paid-in surplus	$	15,000
Net plant and equipment	$	41,300		Retained earnings		3,950
				Total	$	18,950
Total assets	$	54,750		Total liabilities and owners’ equity	$	54,750

   

Prepare a pro forma balance sheet, assuming a 15 percent increase in sales, no new external debt or equity financing, and a constant payout ratio. (Round your answers to 2 decimal places. (e.g., 32.16))

HEIR JORDAN CORPORATION Pro Forma Balance Sheet
Assets				Liabilities and Owners’ Equity
Current assets				Current liabilities
Cash		$		Accounts payable		$
Accounts receivable				Notes payable
Inventory				Total		$
Total		$		Long-term debt		$
				Owners’ equity
Fixed assets				Common stock and paid-in surplus
Net plant and equipment				Retained earnings
				Total		$
Total assets		$		Total liabilities and owners’ equity		$

Calculate the EFN. (Negative amount should be indicated by a minus sign. Round your answer to 2 decimal places. (e.g., 32.16))

EFN

$

Answer 1

Dividend payout ratio = Dividend / net income

                                        = $2500 / $10205

                                        = 24.50%

As a result of increase in sales, cost of sales will also increase, therefore, taxable income will increase by 15%.

Net Income = Current taxable income x (1+ sales growth rate) x (1- tax rate)

                       = $15,700 x (1+ 0.15) x (1-0.35)

                       = $11735.75

Addition to retained earnings = Net Income x (1- payout ratio)

                                                        = $11735.75 x (1- 0.2450)

                                                        = $8860.50

All the assets will increase by 15%.

Cash = 2950 x (1+0.15) = 3392.50

Accounts receivable = 4100 x (1+0.15) = 4715

Inventory = 6400 x (1+0.15) = 7360

Total current assets = 15,467.50

Net Plant and Equipment = 41300 x (1+0.15) = 47,495

Total Assets = 62,962.50

Current liabilities will also increase by 15%

Accounts payable = 2400 x (1+0.15) = $2760

Notes payable = $5,400 x (1+0.15) = 6210

Total current liabilities = 8970

Long term debt= 28000

Common stock = 15000

Retained earnings = 3950+8860.50 = 12810.50

External Financing needed = Total assets – total current liabilities – common stock – Long term debt -retained earnings

                                                   = $62,962.50 - 8970-28000-15000-12810.50

                                                    = $1818

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