Question

Develop a pro forma income statement and balance sheet for the company given below. Use the following assumptions in making your pro forma:

Currently, fixed assets are at full capacity

Each asset grows proportionally with sales

Payables and accruals grow proportionally with sales

2017’s profit margin (2.52%) and dividend payout (30%) will be maintained in 2018

Sales are projected to increase by $500 million (25%)

Interest payments will not change (this is not realistic, but will save you some steps)

All additional funds needed will be raised through long term debt (again, this will save steps)

Income Statement (in millions)

December 31, 2017       Factor               December 31, 2018 (expected)

Sales                                                    $ 2,000                                    x 1.25               $ 2,500

Less: Variable Costs (60%)                    1,200                                   

            Fixed Costs                                      700                                   

   Earnings before int. & taxes               $    100                                   

Interest                                                          16                                                              16

   Earnings before taxes                         $       84

Taxes (40%)                                               33.6                       

Net Income                                          $    50.4                       

Dividends (30%)                                                    15.12                      

Addition to Retained Earnings              $   35.28                      

Balance Sheet (in millions)

2017                                                     2018 (Expected)                                                           

Assets:

Cash and securities                               $     20                                                 

Accounts Receivable                                  240

Inventory                                                  240

Total Current Assets                             $   500

Net Fixed Assets                                        500

Total Assets                                          $1,000

Liabilities and Equity:

Accounts Payable and Accruals             $   100

Notes Payable                                            100

Total Current Liabilities                        $   200

Long-term Debt                                                $   100

Common Stock                                          500

Retained Earnings                                      200

Total Claims                                         $1,000

Additional Funds Needed:                  

Please show the steps on calucating long-term debt, common stock, retained earnings, total claims, and additonal funds needed.        

Answer 1

	Income Statement (in millions)
		2017	2018
	Sales	$2,000	$2,500
	Less: Variable Costs (60%)	$1,200	$1,500
	Fixed Costs	$700	$1,379
	Earnings before int. & taxes	$100	$121
	Interest	$16	$16
	Earnings before taxes	$84	$105
	Taxes (40%)	$34	$42.00
	Net Income	$50.40	$63.00	(0.0252*2500)
	Dividends (30%)	$15.12	$18.90
	Addition to Retained Earnings	$35.28	$44.10
	Balance Sheet (in millions)
		Dec 31,2017	Dec31, 2018(Expected)
	Assets:
	Cash and securities	$20	$25	(20*(2500/2000)
	Accounts Receivable	$240	$300	(240*(2500/2000)
	Inventory	$240	$300	(240*(2500/2000)
	Total Current Assets	$500	$625	(500*(2500/2000)
	Net Fixed Assets	$500	$625	(500*(2500/2000)
	Total Assets	$1,000	$1,250	(1000*(2500/2000)
	Liabilities and Equity:
	Accounts Payable and Accruals	$100	$125	(100*(2500/2000)
	Notes Payable	$100	$125	(100*(2500/2000)
	Total Current Liabilities	$200	$250	(200*(2500/2000)
	Long-term Deb	$100	$255.90	(100+155.90)
	Common Stock	$500	$500
	Retained Earnings	$200	$244.10	(200+44.10)
	Total Claims	$1,000	$1,250
	Additional Funds Needed	$0	$155.90
	CALCULATION OF ADDITIONAL FUNDS NEEDED
	Increase in assets:
	Total Current Assets	$125	(625-500)
	Net fixed assets	$125	(625-500)
	Increase in total assets	$250
	Less:
	Increase in current liabilities	$50	(250-200)
	Increase in Retained earnings	$44.10
	Total	$94.10
	Additional Funds Needed	$155.90	(250-94.10)