Question

  

Dahlia Colby, CFO of Charming Florist Ltd., has created the firm’s pro forma balance sheet for the next fiscal year. Sales are projected to grow by 10 percent to $462 million. Current assets, fixed assets, and short-term debt are 15 percent, 70 percent, and 5 percent of sales, respectively. Charming Florist pays out 25 percent of its net income in dividends. The company currently has $138 million of long-term debt and $66 million in common stock par value. The profit margin is 9 percent.

  

a.	Construct the current balance sheet for the firm using the projected sales figure. (Do not round intermediate calculations and enter your answers in dollars, not millions of dollars, rounded to the nearest whole dollar amount, e.g., 1,234,567.)

  
   

b.	Based on Ms. Colby’s sales growth forecast, how much does Charming Florist need in external funds for the upcoming fiscal year? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to the nearest whole dollar amount, e.g., 1,234,567.)

  
   

c-1.	Construct the firm’s pro forma balance sheet for the next fiscal year. (Do not round intermediate calculations and enter your answers in dollars, not millions of dollars, rounded to the nearest whole dollar amount, e.g., 1,234,567.)

  
     

c-2.	Calculate the external funds needed. (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to the nearest whole dollar amount, e.g., 1,234,567.)

  
     

  
     

Answer 1

a]	Current year's sales = 462000000/110% =	$      420,000,000
	BALANCE SHEET [CURRENT YEAR]
	Current assets [420000000*15%]	$        63,000,000	Short term debt [420000000*5%]	$      21,000,000
	Fixed assts [420000000*70%]	$      294,000,000	LT debt	$ 138,000,000
			Common stock	$      66,000,000
			Retained earnings	$ 132,000,000
	Total assets	$      357,000,000	Total liabilities & equity	$ 357,000,000
b]	AFN is given by the equation:
	AFN = (A/S) x (Δ Sales) - (L/S) x (Δ Sales) - (PM x FS x (1-d))
	where,
	A / S = Assets that change directly with sales.
	Δ sales = Change in sales
	L / S = Liabilities that change directly with sales
	PM = Profit Margin on Sales = net income / sales.
	FS = Forecasted Sales
	d = dividend payout ratio
	(1 - d) = retention ratio
	Substituting required values in the above equation we have,
	EFN = 85%*42000000-5%*42000000-462000000*9%*(1-25%) =	$          2,415,000
c-1]	Projected retained earnings = 462000000*9%*(1-25%) =	$        31,185,000
	BALANCE SHEET [CURRENT YEAR]
	Current assets [462000000*15%]	$        69,300,000	Short term debt [462000000*5%]	$      23,100,000
	Fixed assts [462000000*70%]	$      323,400,000	LT debt	$ 138,000,000
			Common stock	$      66,000,000
			Retained earnings [132000000+31185000]	$ 163,185,000
	Total assets	$      392,700,000	Total liabilities & equity	$ 390,285,000
c-2]	EFN = 392700000-390285000 =	$          2,415,000