Question

Please use the percentage of sales method and the ratio method where appropriate to

forecast 2018E financial statements using the 2017 data. Use formulas to do all

calculations of the forecast estimates and use the iteration formula to determine the

interest expense and amount of debt at the same time.

All assumptions should be included.

At the beginning of 2017, Student Copy anticipated a substantial increase in sales.

Despite good sales the company experienced a shortage of cash and found it needed to

increase its short term borrowing to $500,000.

To do this it had to change banks as its current line of credit was $300,000. The new line

of credit required that it pay off all of its notes payables also and to maintain is

accounts payables at 10 days outstanding. This way it would be able to take all of its

purchase discounts which are 2/10 net 30.

There will be additions to property, plant and equipment as there is a need for

capacity to increase to support this increase in sales. In addition, the company is

trying to keep its days sales outstanding at 30 days and a minimum cash balance as

100,000.

Sales are predicted to increase from $4,519,000 to $5,000,000.

Using the percentage of sales method and ratio method to develop pro forma balance

sheet and income statements for 2018 to determine the amount of BANK DEBT required

to support this sales increase.

Income Statement Student Copy(in thousands)

                                            2017 2018E Assumptions

Sales                                  $4,519              $5,000

Cost of Goods Sold

Beg Inventory                     432                  ______

Purchases                          3,579                ______

Ending Inventory                 587                  ______

Total COGS                     $3,424                      ______

Gross Profit                       1,095                  ______

Operating Expenses           940                       ______

EBIT                                 $ 155                 ______

Interest Expense                 56                       60

EBT                                    $ 99                 ______

Taxes                                    22              ______

NI                                        $77            ______

*Use 35% as the tax rate, and 5% as the interest rate

Balance Sheet of Student Copy

                                                     2017 2018E

Cash                                            $ 56         _______

A/R                                                606     _______

Inventory                                        587       _______

PPE                                               288       _______

Total Assets                                $1537              ________

Bank Debt                                   $ 300               ________PLUG ***

Notes Payable trade                     217                    ________

A/P                                               376            ________

Accr Exp                                       75                       75

LTD Current Portion                     20                               20

LTD                                              100                      80

Equity                                           449                    _______

TL & Equity                        $1537                               _______

Answer 1

Income Statement:

	2017	2017 % of Sales	2018E
Sales	4519	100%	5000
(-) Cost of Goods Sold
Opening Inventory	432		587
Purchases	3579	79.2%	3959.95
Closing Inventory	(587)	12.99%	(649.48)
	(3424)		(3897.47)
Gross profit	1095		1102.53
(-) Operating Expenses	(940)	20.8%	(1040.05)
EBIT	155		62.48
(-) Interest	(56)		(60)
EBT	99		2.48
(-) Taxes	(22)		(0.868)
NI	77		1.612

Balance Sheet:

	2017	Comp for 2018E	2018E
Assets:
Cash	56	*see Cash flow st	100
A/R	606	5000 * 30/365	410.96
Inventory	587		649.48
PPE	288	(288/4519) * 5000	318.65
Total Assets	1537		1479.09
Equity + Liabilities
Bank Debt	300	*see Cash flow st	527.99
Notes Payable for trade	217		217
A/P	376	3959.95 * 10/365	108.49
Acc Exp	75		75
LTD Current Portion	20		20
LTD	100		80
Equity	449	449 + 1.612	450.612
Total Equity + liabilities	1537		1479.09

*Cash flow statement:

Cash flow from Operating Activities:
NI + Interest	61.612
Changes in WC:
A/R (606 - 410.96)	195.04
Inventory (587 - 649.48)	(62.48)
A/P (-376 + 108.49)	(267.51)
Total CFO	(73.34)
Cash flow from Investing Activities:
Purchase of PPE (288 - 318.65)	(30.65)
Total CFI	(30.65)
Cash flow from Financing Activities:
Interest payment	(60)
Repayment of LTD (80 - 100)	(20)
Total CFI	(80)
Net cash change during the year	(183.99)
(+) Opening cash balance	56
Total cash at year end	(127.99)
Minimum cash balance required	100
Addition Bank debt to take (-127.99 - 100)	227.99
Cash Balance at year end	100