Question

1.

The most recent financial statements for Cornwall, Inc., are shown here:

Income Statement				Balance Sheet
Sales	$	6,000		Current assets	$	2,700		Current liabilities	$	2,200
Costs		4,950		Fixed assets		9,100		Long-term debt		3,750
Taxable income	$	1,050						Equity		5,850
Taxes (34%)		357		Total	$	11,800		Total	$	11,800
Net income	$	693

Assets, costs, and current liabilities are proportional to sales. Long-term debt and equity are not. The company maintains a constant 40 percent dividend payout ratio. As with every other firm in its industry, next year’s sales are projected to increase by exactly 10 percent.

What is the external financing needed? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

External financing needed

$

2.

Consider the following income statement for the Heir Jordan Corporation:

HEIR JORDAN CORPORATION Income Statement
Sales				$	42,000
Costs					32,800
Taxable income				$	9,200
Taxes (35%)					3,220
Net income				$	5,980
Dividends	$	1,800
Addition to retained earnings		4,180

The projected sales growth rate is 10 percent.

  

Prepare a pro forma income statement assuming costs vary with sales and the dividend payout ratio is constant. (Input all amounts as positive values. Do not round intermediate calculations.)

HEIR JORDAN CORPORATION Pro Forma Income Statement
Sales	$
Costs
Taxable income	$
Taxes
Net income	$

What is the projected addition to retained earnings? (Do not round intermediate calculations.)

Addition to retained earnings

$

Answer 1

1) Current Net profit margin = Net income / Sales = $693 / $6000 = 0.1155 or 11.55%

Next year sales = $6000 + 10% = $6600

Next year net profit margin = $6600 x 11.55% = $762.30

Addition to retained earnings = Next year net profit margin x (1 - payout ratio) = $762.30 x (1 - 0.40) = $457.38

Pro forma Balance Sheet

Current Assets	$2700 + 10% = $2970	Current Liabilities	$2200 + 10% = $2420
Fixed Assets	$9100 + 10% = $10,010	Long term debt	$3,750
		Equity	$5850 + $457.38 = $6,307.38
Total	$12,980	Total	$12,477.38

External Financing needed = $12980 - $12477.38 = $502.62

2) Current dividend payout ratio = Dividend / net income = $1800 / $5980 = 0.30100334448

Pro forma Income statment

Sales ($42,000 + 10%)	$46,200
Less: Costs ($32,800 + 10%)	$36,080
Taxable income	$10,120
Less: Taxes @35%	$3,542
Net Income	$6,578
Less: Dividends ($6,578 x 0.30100334448)	$1,980
Addition to retained earnings	$4,598