Question

Budda-Bing Manufacturing is planning to implement a major plant-modernization program to improve its competitive position. Included will be construction of a state-of-the-art manufacturing facility that will cost $400,000 in 2019 and is expected to lower the company's variable cost per tonne of steel. Tony and Pauli, experienced budged analysts, have been charged with preparing a forecast of the firm's 2019 financial position assuming construction of the proposed new facility. They plan to use the 2018 financial statements presented below along with the forecasts for other financial accounts in the key projected financial data chart.

a.) Use the historic and projected financial data provided to prepare a pro forma income statements and balance sheet for the year ended December 31, 2019.

b.) Will Budda-Bniing Manufacturing Company need to obtain external financing to fund construction of the proposed facility? Explain. Prepare a Statement of EFR.

c.) How would you recommend Budda-Bing raise the required financing? What options might be available if the company wanted to explore all opportunities other than using their line of credit?

INCOME STATEMENT

BUDDA-BING, FOR THE YEAR ENDED DECEMBER 31, 2018

Sales revenue $5,075,000

Less: Cost of Goods Sold $3,704,000

Gross Margin $1,371,000

Less: Operating Expenses

Selling expense $650,000

General and administrative expenses $416,000

Amortization Expense $152,000

Total operating expense: $1,218,000

Operating Earnings (EBIT) $153,000

Less: Interest expense $93,000

Earnings before taxes $60,000

Less: Taxes (rate = 40%) $24,000

Net income after taxes $36,000

BALANCE SHEET

ASSETS

Current Assets

Cash $25,000

Accounts Receivable $805,556

Inventories $700,625

Total Current Assets $1,531,181

Gross fixed assets (at cost) $2,093,819

Less: Accumulated Amortization $500,000

Net fixed assets $1,593,819

Total assets $3,125,000

LIABILITIES AND SHAREHOLDERS EQUITY

Current Liabilities

Accounts Payable $230,000

Line of credit $311,000

Accruals $75,000

Total current liabilities $616,000

Long term debt $1,165,250

Total Liabilities $1,781,250

Shareholders Equity

Preferred shares $50,000

Common shares $293,750

Retained earnings $1,000,000

Total shareholders equity $1,343,750

Total Liabilities and shareholders equity $3,125,000

KEY PROJECTED FINANCIAL DATA (2019)

Budda-Bing

Sales: Increase to $8,500,000

Cost of goods sold: Remain the same % age of sales

Selling Expense: Increase by 20%

General and administrative expense: Increase by 33%

Accumulated Amortization: Increase to $700,000

Interest expense: Increase to $110,000

Tax rate: 40%

Dividend payments: $40,000

Average age of inventory: 52 days

Average collection period: 52 days

Average payment period: 29 days

Accruals: Increase to $96,000

Long-term debt, preferred and common shares: Remain the same

Cash Balance: remain the same, $25,000

Answer 1

a)

b) Cost of neww facility = $400,000

Closing Cash = $576,032

Therefore, external funding not required as Budda can use from its existing cash.