Question

Forecast the Pro forma Financial Statements for Company C using the % of Sales Method assuming: sales increase by $100,000 in 2017; the company must increase Fixed Assets to $200,000 to support the higher level of production; all new financing will come from additional debt, and the payout ratio, the effective tax rate, and the rate of interest on debt will remain unchanged from 2016. Based on two iterations, what do you forecast for the amount of debt and the D/E-ratio required to support this new growth?

Company C
	Pro Forma Income Statement		Iteration 1	Iteration 2
	Actual 2016	% of Sales	2017	2017
Sales ($000)	400
CGS	300
EBIT	100
Interest Expense	20
Profit bef. Taxes	80
Taxes	32
Net Income	48
Dividend Payment	24
Payout Ratio	0.5
Tax Rate	0.4
Int. Rate	0.125
	Pro Forma Balance Sheet		Iteration 1	Iteration 2
	Actual 2016	% of Sales	2017	2017
Cash ($000)	80
A/R	60
Inventory	60
Fixed Assets	175
Total	375
A/P	72
Debt	160
Stockholder's Equity	143
Total	375
EFN
Addn to RE

Answer 1

Soln : Please refer here the table, we have filled all details, as based on the increase in sales, we have changed cost of sales, A/R = % of share in sales * New sales, A/P = % share of cost of goods * cost of goods

Inventory = % share of cost of goods * cost of goods.

Also, Itinery 1 is when fixed asset is financed by profit earned by value 24 and remaining 1 will be financed by Debt, accordingly the interest is calculated.

Also, there will be change in working capital accordingly we have increased the Debt.:

Company C
	Pro Forma Income Statement		Iteration 1	Iteration 2
	Actual 2016	% of Sales	2017	2017
Sales ($000)	400	25%	500	500
CGS	300	25%	375	375
EBIT	100		125	125
Interest Expense	20		21.625	23.875
Profit bef. Taxes	80		103.375	101.125
Taxes	32		41.35	40.45
Net Income	48		62.03	60.68
Dividend Payment	24		31.01	30.34
Payout Ratio	0.5
Tax Rate	0.4
Int. Rate	0.125
	Pro Forma Balance Sheet		Iteration 1	Iteration 2
	Actual 2016	% of Sales	2017	2017
Cash ($000)	80		111.01	110.34
A/R	60	15%	75.00	75.00
Inventory	60	20%	75.00	75.00
Fixed Assets	175		200.00	200.00
Total	375		461.01	460.34
A/P	72	0.24	90.00	72.00
Debt	160		173.00	191.00
Stockholder's Equity	143		167.00	167.00
Total	375		430.00	430.00
EFN			28.99	47.66
Addn to RE			31.01	30.34
Total Liabilities +RE			461.01	460.34

D/E ratio for iteration 1 & 2

D/E

1.036

1.144