Question

Use the following Income Statement and Balance Sheet of firm X to answers Questions (1) & (2)

Income Statement, 2016			Balance Sheet, 2016
Sales	5,000,000		Assets
Costs except Depr.	-3,500,000		Cash and Equivalents	1,096,000
EBITDA	1,500,000		Accounts Receivable	960,000
Depreciation	-10,900		Inventories	90,000
EBIT	1,489,100		Total Current Assets	2,146,000
Interest Expense (net)	-100,500		Property Plant & Equipment	2,190,000
Pretax Income	1,388,600		Total Assets	4,336,000
Income Tax	-486,010		Liabilities &Equity
Net Income	902,590		Accounts Payable	900,000
			Debt	950,000
			Total Liabilities	1,850,000
			Stockholders' Equity	2,486,000
			Total Liabilities and Equity	4,336,000

Sales in 2017 are expected to grow at a rate of 9% with respect to the values of 2016. Assume the company pays out 55% of its net income.

1. Use the percent sales method to forecast the value of next year's stockholder's equity for firm X.

2. Use the percent sales to estimate the firm s net new financing for firm X.

For question 1 i know the answer is 2,931,366 and for question 2 i know the answer is -136,126. but how do i get those answers?

Answer 1

Using the percent sales method, every item will vary porportionate to sales (except debt). So, if sales increase by 9%, then every item except debt will increase by 9%.

1) Tax rate = Tax / Pretax income = 486,010 / 1,388,600 = 0.35 or 35%

Why we are calculating the tax rate? Because the pretax income does not increase by 9% (due to same level of interest). So, it would be incorrect if we increase it by 9%.

Pro forma income statement next year

Sales (5,000,000 + 9%)	5,450,000
Less: Cost of Goods sold (3,500,000 + 9%)	3,815,000
EBITDA	1,635,000
Less: Depreciation (10,900 + 9%)	11,881
EBIT	1,623,119
Less: Interest	100,500
Pretax Income	1,522,619
Less: Income tax @35%	532,917
Net Income	989,702
Less: Dividends @55%	544,336
Addition to stockholders' equity	445,366

New stockholders' equity next year = 2,486,000 + 445,366 = 2,931,366

2) Now, we prepare the balance keeping in mind that all assets and liabilities will increase by 9% except debt.

Pro forma balance sheet next year

Assets	Amount	Liabilities and Equity	Amount
Cash and equivalents (1,096,000+9%)	1,194,640	Accounts Payable (900,000 + 9%)	981,000
Accounts Receivable (960,000 + 9%)	1,046,400	Debt	950,000
Inventories (90,000 + 9%)	98,100	Total Liabilities	1,931,000
Total current assets	2,339,140	Stockholders' Equity	2,931,366
Property, Plant & Equipment (2,190,000 + 9%)	2,387,100
Total assets	4,726,240	Total Liabilities and Equity	4,862,366

External Financing Needed = Total assets - Total Liabilities and Equity = 4,726,240 - 4,862,366 = (-)136,126