In: Finance
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 $210,000 per year for the next 4 years, and it forecasts that the ratio of revenues to total assets will remain at 1.50. Annual depreciation is 20% of net fixed assets at the beginning of the year. Fixed costs are expected to remain at $58 and variable costs at 70% of revenue. The company’s policy is to pay out one-half 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 | 58 | |||||
Variable costs (70% of revenue) | 1,260 | |||||
Depreciation | 168 | |||||
Interest (6% of beginning-of-year debt) | 18 | |||||
Taxable income | 296 | |||||
Taxes (at 35%) | 104 | |||||
Net income | $ | 192 | ||||
Dividends | $ | 96 | ||||
Addition to retained earnings | $ | 96 | ||||
BALANCE SHEET, YEAR-END (Figures in $ thousands) |
|||
2019 | |||
Assets | |||
Net working capital | $ | 360 | |
Fixed assets | 840 | ||
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?
(a1) Income statement for 2020:
Particulars | Amount |
Revenue [15,75,000×1.50] | 23,62,500 |
Less: Fixed cost | 58,000 |
Less: Variable cost @70% of Revenue | 16,53,750 |
Less: Depreciation @20% of Net Fixed Assets at the beginning of the year | 1,68,000 |
Less: Interest@6% of Beginning of year debt | 18,000 |
Taxable income | 4,64,750 |
Less: Tax@35% | 1,62,662.5 |
Net Income | 3,02,087.5 |
Dividend@50% of Net income | 1,51,043.75 |
Additions to Retained Earnings | 1,51,043.75 |
(a2) Balance sheet for 2020:
Particulars | Amount |
Assets | |
Net working capital@50% of Net Fixed Assets | 5,25,000 |
Fixed Assets[8,40,000+2,10,000] | 10,50,000 |
Total Assets | 15,75,000 |
Liabilities and Shareholder's Equity | |
Debt@20% of Total capital[15,75,000×20%] | 3,15,000 |
Equity | 12,60,000 |
Total liabilities and Shareholder's Equity | 15,75,000 |
(b) Pro-forma Balance sheet for 2020:
Particulars | Amount |
Total Assets | 15,75,000 |
Liabilities and Equity | |
Debt( Balancing Figure) | 6,75,000 |
Equity( if remains same) | 9,00,000 |
Total liabilities and Equity | 15,75,000 |
(c) Projected Debt Equity Ratio 2022:
Balance sheet for 2021:
Particulars | Amount |
Assets | |
Net working capital | 6,30,000 |
Fixed assets[10,50,000+2,10,000] | 12,60,000 |
Total Assets | 18,90,000 |
Liabilities and Equity | |
Debt | 9,90,000 |
Equity | 9,00,000 |
Total liabilities and Equity | 18,90,000 |
Balance sheet for 2022:
Particulars | Amount |
Assets | |
Net working capital | 7,35,000 |
Fixed Assets[12,60,000+2,10,000] | 14,70,000 |
Total Assets | 22,05,000 |
Liabilities and Equity | |
Debt | 13,05,000 |
Equity | 9,00,000 |
Total liabilities and Equity | 22,05,000 |
Debt Equity Ratio for 2022:
= Debt÷ Equity
= 13,05,000÷9,00,000
= 1.45