Question

Cheryl Colby, CFO of Charming Florist Ltd., has created the firm’s pro forma balance sheet for the next fiscal year. Sales are projected to grow by 12 percent to $490 million. Current assets, fixed assets, and short-term debt are 20 percent, 75 percent, and 10 percent of sales, respectively. The company pays out 25 percent of its net income in dividends. The company currently has $134 million of long-term debt, and $62 million in common stock par value. The profit margin is 10 percent.
a. Prepare the current balance sheet for the firm using the projected sales figure. (Do not round intermediate calculations. Accounts should be entered by order of liquidity (e.g. current accounts before long-term). Enter your answers in dollars, not millions of dollars, e.g. 1,234,567.)
b. Based on the sales growth forecast, how much does the company need in external funds for the upcoming fiscal year using the EFN equation from the textbook? (Do not round intermediate calculations. Enter your answer in dollars, not millions of dollars, e.g. 1,234,567.)
c-1. Prepare the firm’s pro forma balance sheet for the next fiscal year. (Do not round intermediate calculations. Accounts should be entered by order of liquidity (e.g. current accounts before long-term). Enter your answers in dollars, not millions of dollars, e.g. 1,234,567.)
c-2. Calculate the external funds needed. (Do not round intermediate calculations. Enter your answer in dollars, not millions of dollars, e.g. 1,234,567.)

Answer 1

a - Projected Sales = $490,000,000 (which is with 12% increase over current Sales)

Current sales = $490,000,000/1.12 = $437,500,000

Given, Current assets, fixed assets, and short-term debt are 20 percent, 75 percent, and 10 percent of sales:

Current Balance Sheet:

Liabilities	Amount	Assets	Amount
Short-term debts	$43,750,000	Current Assets	$87,500,000
Long-term debts	$134,000,000	Fixed Assets	$328,125,000
Common Stock	$62,000,000
Retained Earnings*	$175,875,000
Total	$415,625,000	Total	$415,625,000

*Retained Earnings = Balancing Figure

Sales Increase = $490,000,000 - $437,500,000 = $52,500,000; 10% Profit margin = $5,250,000; 25% pays as dividend = $1,312,500.

Projected Retained Earnings = Opening Balance + Projected Profit - Dividend payment

= $175,875,000 + $5,250,000 - $1,312,500

=$179,812,500

b- Proforma Balance Sheet:

We have to calculate: Current assets, fixed assets, and short-term debt are 20 percent, 75 percent, and 10 percent of projected sales.

Projected Retained Earnings calculated above

Liabilities	Amount	Assets	Amount
Short-term debts	$49,000,000	Current Assets	$98,000,000
Add: External Funds	$40,687,500	Fixed Assets	$367,500,000
Long-term debts	$134,000,000
Common Stock	$62,000,000
Retained Earnings	$179,812,500
Total	$465,500,000	Total	$465,500,000

External Funds = $40,687,500 (Balancing figure above)