Question

Garlington Technologies Inc.’s 2018 financial statements are shown here: Balance Sheet as of December 31, 2018 Cash $ 180,000 Accounts payable $ 360,000 Receivables 360,000 Notes payable 156,000 Inventories 720,000 Line of credit 0 Total current assets $1,260,000 Accruals 180,000 Fixed assets 1,440,000 Total current liabilities $ 696,000 Common stock 1,800,000 Retained earnings 204,000 Total assets $2,700,000 Total liabilities and equity $2,700,000 Income Statement for December 31, 2018 Sales $3,600,000 Operating costs 3,279,720 EBIT $ 320,280 Interest 18,280 Pre-tax earnings $ 302,000 Taxes (40%) 120,800 Net income $ 181,200 Dividends $ 108,000

Suppose that in 2019 sales increase by 10% over 2018 sales and that 2019 dividends will increase to $112,000. Forecast the financial statements using the forecasted financial statement method. Assume the firm operated at full capacity in 2018. Use an interest rate of 13%, and assume that any new debt will be added at the end of the year (so forecast the interest expense based on the debt balance at the beginning of the year). Cash does not earn any interest income. Assume that the all-new debt will be in the form of a line of credit.

Answer 1