Question

Use the following information on Company Y and perform pro-forma financial modeling using a planned expansion method to answers question (1) and (2). To do this assume that the percentage values with respect to sales of the (i) costs except depreciation, (ii) cash and equivalents, (iii) accounts receivable, (iv) inventories, and (v) accounts payable will stay fixed at the values corresponding for 2016.

Assume also that income tax will remain at 35% of the Pretax Income.

Consider Company Y. This firm sells a product for which in 2016 the total market size was of 1999000 units, of which Company Y owned a share of 30%.

Both, the total market size and Company Y’s market share are expected to grow at a 4% yearly rate for the next five years.

The price of the product is $114 in 2016 and is expected to remain at that price for the next years.

Market Analysis	2016	2017	2018	2019
Market Size	1,999,000	2,078,960	2,162,118	2,248,603
Market Share	30%	31%	32%	34%
Production Volume	599,700
Sales Price:	$   114.00
Sales

In 2016, the outstanding debt of Company Y is $900000, for which the company makes yearly interest payments of 11%. The executives of Company Y are considering making a significant capital investment in 2017 of $2900000 to purchase new machinery. The company plans to finance this investment with a 30-year loan that makes yearly interest payments equivalent to 8% of its principal. The principal is paid when the loan matures.

The following table summarizes the debt and interest payment of Company Y.

Debt and Interest Table		2016	2017	2018
Outstanding Debt		900,000	900,000	3,800,000
New Net Borrowing			2,900,000
Interest on Debt

Currently, Company Y makes yearly expenditures on replacement capital investment of $90000. If the company makes the planned expansion it is decided the company will perform yearly expenditures on replacement capital investment of $325000. The current and the planned expenditures on replacement of capital investment will be financed by the company’s cash flow.

The following table indicates for 2016 Company Y’s values of i. opening book value, ii. capital investment, iii. depreciation, and iv. closing book value. The Table also indicates the 2017-2018 forecast values of capital depreciation if the planned expansion were to occur in 2017.

Fixed Assets & Capital Investment	2016	2017	2018
Opening Book Value	1,500,000
Capital Investment	90,000
Depreciation	-127,200	-356,224	-353,726
Closing Book Value	1,462,800

The following table contains Company Y’s income statement.

Income Statement:	2016	2017
Sales	68,365,800
Costs except Depr.	-5,469,264
EBITDA	62,896,536
Depreciation	-127,200
EBIT	62,769,336
Interest Expense (net)	-99,000
Pretax Income	62,670,336
Income Tax	-21,934,618
Net Income	40,735,718

The following table contains Company Y’s balance sheet.

Balance Sheet	2016	2017
Assets
Cash and Equivalents	23,928,030
Accounts Receivable	23,928,030
Inventories	10,254,870
Total Current Assets	58,110,930
Property Plant and Equipment	1,462,800
Total Assets	59,573,730
Liabilities and Equity
Accounts Payable	23,928,030
Total Current Liabilities	23,928,030
Debt	900,000
Total Liabilities	24,828,030
Stockholders' Equity
Starting Stockholders' Equity	8,000,000
Net Income	40,735,718
Dividends	-13,990,018
Stockholders' Equity	34,745,700
Total Liabilities & Equity	59,573,730

1.      Before making any adjustments to balance Total Assets with Total Liabilities and Equity, what is Company Y s forecast value of Total Liabilities and Equity for 2017?"

2.      How much are the net new financing for Company Y s on 2017?

Answer 1

Note:
Market Analysis	2016	2017	2018	2019
Market Size	1,999,000	2,078,960	2,162,118	2,248,603
Market Share	30%	31%	32%	34%
Production Volume	599,700	644,478	691,878	764,525
Sales Price:	$114	$114	$114	$114
Sales	68,365,800	73,470,492	78,874,092	87,155,850

Debt and Interest Table		ROI	2016	2017
Outstanding Debt		11%	900,000	900,000
New Net Borrowing		8%		2,900,000
Interest on Debt			99,000	331,000

Fixed Assets & Capital Investment	2016	2017	2018
Opening Book Value	1,500,000	1,462,800	1,431,576
Capital Investment	90,000	325,000	325,000
Depreciation	-127,200	-356,224	-353,726
Closing Book Value	1,462,800	1,431,576	1,402,850

The following table contains Company Y’s income statement.
Income Statement:		2016	2017
Sales		68,365,800	73,470,492
Costs except Depr.	8%	-5,469,264	-5,877,639
EBITDA		62,896,536	67,592,853
Depreciation		-127,200	-356,224
EBIT		62,769,336	67,236,629
Interest Expense (net)		-99,000	-331,000
Pretax Income		62,670,336	66,905,629
Income Tax	35%	-21,934,618	(23,416,970)
Net Income		40,735,718	43,488,659

The following table contains Company Y’s balance sheet.
Balance Sheet		2016	2017
Assets
Cash and Equivalents	35%	23,928,030	25,714,672
Accounts Receivable	35%	23,928,030	25,714,672
Inventories	15%	10,254,870	11,020,574
Total Current Assets		58,110,930	62,449,918
Property Plant and Equipment		1,462,800	1,431,576
Total Assets		59,573,730	63,881,494

Liabilities and Equity
Accounts Payable	35%	23,928,030	25,714,672
Total Current Liabilities		23,928,030	25,714,672
Debt		900,000	3,800,000
Total Liabilities		24,828,030	29,514,672
Stockholders' Equity
Starting Stockholders' Equity		8,000,000	34,745,700
Net Income		40,735,718	43,488,659
Dividends		-13,990,018	(43,867,537)
Stockholders' Equity		34,745,700	34,366,822
Total Liabilities & Equity		59,573,730	63,881,494
Note: Dividends Taken as residual value

(1)What is Company Y’s forecast value of Total Liabilities and Equity for 2017 without any adjustment into balance
Total Assets for 2017 will be 63,881,494

Total Liabilities & Equity for 2017 will be 63,881,494 (from this dividend assumed to be paid 43,867,537)

2) Net new financing for Company Y’s on 2016: is 2,900,000