Question

1.

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

Income Statement				Balance Sheet
Sales	$	7,400		Current assets	$	4,100		Current liabilities	$	2,200
Costs		6,000		Fixed assets		9,800		Long-term debt		3,750
Taxable income	$	1,400						Equity		7,950
Taxes (34%)		476		Total	$	13,900		Total	$	13,900
Net income	$	924

Assets, costs, and current liabilities are proportional to sales. Long-term debt and equity are not. The company maintains a constant 20 percent dividend payout ratio. As with every other firm in its industry, next year’s sales are projected to increase by exactly 15 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				$	43,200
Costs					34,000
Taxable income				$	9,200
Taxes (35%)					3,220
Net income				$	5,980
Dividends	$	2,700
Addition to retained earnings		3,280

The projected sales growth rate is 15 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 = $924 / $7400 = 0.12486486486

Next year sales = $7400 + 15% = $8510

Next year net profit margin = $8510 x 0.12486486486 = $1062.60

Addition to retained earnings = Next year net profit margin x (1 - payout ratio) = $1062.60 x (1 - 0.20) = $850.08

Pro forma Balance Sheet

Current Assets	$4100 + 15% = $4715	Current Liabilities	$2200 + 15% = $2530
Fixed Assets	$9800 + 15% = $11270	Long term debt	$3,750
		Equity	$7950 + $850.08 = $8800.08
Total	$15985	Total	$15080.08

External Financing needed = $15985 - $15080.08 = $904.92

2) Current dividend payout ratio = Dividend / net income = $2700 / $5980 = 0.45150501672

Pro forma Income statment

Sales ($43,200 + 15%)	$49,680
Less: Costs ($34,000 + 15%)	$39,100
Taxable income	$10,580
Less: Taxes @35%	$3,703
Net Income	$6,877
Less: Dividends ($6,877 x 0.45150501672)	$3,105
Addition to retained earnings	$3,772