Adel Sporting Goods recently reported the following income statement and balance sheet.

INCOME STATEMENT

Sales........................................... $4,200

Operating costs.................................3,780

EBIT............................................ $ 420

Interest............................................ 120

EBT............................................. $ 300

Taxes (40%)...................................... 120

Net income..................................... $ 180

Dividends paid.....................................$ 0

Addition to retained earnings............... $ 180

BALANCE SHEET

Cash and marketable securities............... $ 42

Accounts receivable.......................................336

Inventories....................................... 441

Current assets................................. $ 819

Net fixed assets............................... 2,562

Total assets....................................$3,381

Accounts payable and accruals............. $ 168

Notes payable....................................250

Current liabilities............................. $ 418

Long-term debt................................. 700

Common stock.................................. 400

Retained earnings............................. 1,863

Total liabilities and equity................. $3,381

In developing its forecast for the upcoming year, the company has assembled the following information:

Sales are expected to increase 8 percent this upcoming year.

• Operating costs are expected to remain at 90 percent of sales.

• Cash and marketable securities are expected to remain at 1 percent of sales.

• Accounts receivable are expected to remain at 8 percent of sales.

• Due to excess capacity, the company expects that its year-end inventories will remain at current levels.

• Fixed assets are expected to remain at 61 percent of sales.

• Spontaneous liabilities (accounts payable and accruals) are expected to increase at the same rate as sales.

• The company will continue to pay a zero dividend, and its tax rate will remain at 40 percent.

• The company anticipates that any additional funds needed will be raised in the following manner: 25 percent notes payable, 25 percent long-term debt, and 50 percent common stock.

a. On the basis of the assumptions listed above, construct Adel's pro forma income statement and balance sheet. Assume that there are no financial feedback effects. (That is, assume interest will remain unchanged even though the company may increase its debt.)

b. On the basis of this forecast, describe changes from the prior year that Adel should expect in its return on equity, inventory turnover ratio, and profit margin.