Question

XYZ Company Income Statement

Sales	$140,000
Cost of Goods Sold	117,000
Gross Profit	23,000
Operating Expenses	12,830
EBIT	10,170
Taxes @39%	2168
Net income	3,392
Dividend	1,018
Addition to Retained Earnings	$2,374

XYZ Company
Balance Sheet

Current Assets
Cash	$7,500
Accounts Receivable	12,100
Inventory	10,400
Prepaid Items	5,900
Other CA	4,300
Total Current Assets	$40,200
Net Plant $ Equipment	82,300
Total Assets	$122,500

XYZ Company Balance Sheet

Current Liabilities
Accounts Payable	$7,200
Wages Payable	3,600
Notes payable	5,400
Taxes Payable	4,200
Total Current Liabilities	$20,400
Long Term Debt	35,700
Total Liabilities	$56,100
Common Stock Retained Earnings	28,700 37,700
Total Liabilities & Equity	$122,500

Questions

The projected sales for the forecast period is $165,000. Assume that the payout ratio will be maintained in the forecast period. The firm estimates that additional net fixed asset investment of $18,000 will be required during the forecast period. Assume that all current assets are spontaneous except Other Current Assets which is assumed not to change. Assume that all current liabilities except Notes Payable are spontaneous.

A. Prepare the pro forma Balance Sheet and pro forma Income Statement. The EFR will be a plug number that makes the balance sheet balance like in the class example.

B.  Using the existing financial statements as your basis, estimate firm XYZ’s EFR for the forecast period again, but this time using the cookbook model. Assume that the profit margin remains the same in the forecast period. Also based on the cookbook equation, how much funding is expected to come from each of the internal sources of funds (change in SL and retained earnings). If firm XYZ must maintain a minimum current ratio of 1.8 and a maximum debt ratio of 0.50, how would you propose the EFR be financed (how much short term debt, long term debt, and equity)?

C.  Based on your results in part B, prepare a Pro Forma Sources and Uses of Funds Statement to reflect the financing allocations that you decided on in part B. The only format change required is to break the total EFR down into the amounts of short term debt, long term debt, and new equity. You will have to use the numbers for △CA, △SL, addition to R.E., and EFR that you calculated in part B to make it balance, since they may be slightly different than those from part A. Explain the basis for your financing allocations.

Answers

-Pro forma EFR = $18,589

-Cookbook EFR = $18,941

-Financing Plan with constraints at their limits

Additional Notes Payable: $2,820

Additional LTD: $11,861

Additional Equity: $4,260

Answer 1

Pro forma Financial Statement:

A pro forma financial statement is prepared for the income statement and a balance sheet. A projected income statement and balance sheet are called pro format financial statements. These contain the projected future values.

A)

Income   Statement
	Current	Ratio (Vertical Analysis) (see Note 1)	Projected (See Note   2)
Sales	$140,000	100.00%	$ 165,000
Cost of Goods Sold	117,000	83.57%	$ 137,893
Gross Profit	$23,000	16.43%	$ 27,107
Operating Expenses	12,830	9.16%	$ 15,121
EBIT	10,170	7.26%	$ 11,986
Interest Expense	4,610	3.29%	$ 5,433
EBT 5,560 Taxes @ 39%	2,168	1.55%	$ 2,555
Net Income	$3,392	2.42%	$ 3,998
Dividend	1,018	0.73%	$ 1,200
Addition to Retained Earnings	$2,374	1.70%	$ 2,798
Balance Sheet
	Current	Ratio (Vertical Analysis) (see Note 3)	Projected (See Note   4)
Assets
Current   Assets:
Cash	$7,500	6.12%	$ 8,840
Accounts Receivable	12,100	9.88%	$ 14,261
Inventory	10,400	8.49%	$ 12,257
Prepaid Items	5,900	4.82%	$ 6,954
Other CA	4,300	3.51%	$ 4,300
Total Current Assets	$40,200	32.82%	$ 46,612
Net Plant & Equipment	82,300	67.18%	$ 100,300
Total Assets	$122,500	100.00%	$ 146,912
Liabilities & Equity
Current   Liabilities:
Accounts Payable	$7,200	5.88%	$ 7,200
Wages Payable	3,600	2.94%	$ 4,243
Notes Payable	5,400	4.41%	$ 5,400
Taxes Payable	4,200	3.43%	$ 4,950
Total Current Liabilities	$20,400	16.65%	$ 21,793
Long Term Debt	35,700	29.14%	$ 53,700
Total Liabilities	$56,100	45.80%	$ 75,493
Common Stock	28,700	23.43%	$ 30,961
Retained Earnings	37,700	30.78%	$ 40,498
Total Liabilities & Equity	$122,500	100.00%	$ 146,912

Note 1: The elements in the current year has been computed as percentage of revenue (sales).

Note 2: The amount and percentage in the projected year have been computed based on new projected revenue.

Note 3 & Note 4: The percentage in the balance sheet items for asset components and equity & liability components have been computed as the percentage of the total assets and total shareholders' equity and liability, respectively, which has been computed based on the given constraints. All amount has been found based on percentage.

B) & C)

Estimation   of firm XYZ's EFR for the forecast period
Particulars	Amount
Ending Total Asset (a)	$ 146,912
Less: Beginning Total Asset	$ 122,500
Change in the total asset ($146,912 -   $122,500)	$ 24,412
Less: Cash generated from operations	$ (2,798)
Required External Finance (b)	$ 21,614
EFR (External Finance Ration) (b/a)	14.71%
Source of External Finance
	Current (a)	Projected (b)	Amount (a - b)
Wages Payable	$ 3,600	$    4,243	$ 643
Taxes Payable	$ 4,200	$    4,950	$ 750
Long Term Debt	$ 35,700	$    53,700	$ 18,000
Common Stock	$ 28,700	$    30,961	$ 2,261
Total			$ 21,614