Question

The following tables contain financial statements for Dynastatics Corporation. Although the company has not been growing, it now plans to expand and will increase net fixed assets (i.e., assets net of depreciation) by $240,000 per year for the next 5 years, and it forecasts that the ratio of revenues to total assets will remain at 1.50. Annual depreciation is 10% of net fixed assets at the beginning of the year. Fixed costs are expected to remain at $64 and variable costs at 80% of revenue. The company’s policy is to pay out two-thirds of net income as dividends and to maintain a book debt ratio of 20% of total capital.

INCOME STATEMENT, 2019 (Figures in $ thousands)
Revenue				$	1,800
Fixed costs					64
Variable costs (80% of revenue)					1,440
Depreciation					96
Interest (8% of beginning-of-year debt)					24
Taxable income					176
Taxes (at 40%)					70
Net income				$	106
Dividends	$	71
Addition to retained earnings	$	35

BALANCE SHEET, YEAR-END (Figures in $ thousands)
	2019
Assets
Net working capital	$	240
Fixed assets		960
Total assets	$	1,200
Liabilities and shareholders’ equity
Debt	$	300
Equity		900
Total liabilities and shareholders’ equity	$	1,200

Required:

a1. Produce an income statement for 2020. Assume that net working capital will equal 50% of fixed assets.

a2. Produce a balance sheet for 2020. Assume that net working capital will equal 50% of fixed assets.

b. Now assume that the balancing item is debt and that no equity is to be issued. Prepare a completed pro forma balance sheet for 2020.

c. Assume that the balancing item is debt and that no equity is to be issued, what is the projected debt ratio for 2022?

Answer 1