# Question: Craig Computers makes bulk purchases of small computers stocks them

Craig Computers makes bulk purchases of small computers, stocks them in conveniently located warehouses, and ships them to its chain of retail stores. Following is Craig’s balance sheet as of December 31 (all figures are in millions of dollars):
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The firm’s sales totaled \$350 million in 2015, and its net income for the year was \$10.5 million. Craig paid dividends of \$4.2 million to common stockholders. Sales are projected to increase by \$70 million, or 20 percent, during 2016. The firm is operating at full capacity.
a. Construct Craig’s pro forma balance sheet for December 31, 2016. Assume that all external capital requirements are met by bank loans, which are reflected in notes payable. Do not consider any financing feedback effects.
b. Calculate the following ratios, based on your projected December 31, 2016, balance sheet. Craig’s 2015 ratios and industry average ratios are shown here for comparison:
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c. Assume that Craig grows by the same \$70 million but that the growth is spread over five years—that is, sales grow by \$14 million each year. Do not consider any financing feedback effects.
(1) Construct a pro forma balance sheet as of December 31, 2020, using notes payable as the balancing item.
(2) Calculate the current ratio, debt ratio, and return on equity as of December 31, 2020. (Hint: Use total sales, which amount to \$1,960 million, to calculate retained earnings, but use 2020 profits to calculate the rate of return on equity. That is, ROE = [2020 profits] ÷ [12/31/20 equity].)
d. Do the plans outlined in parts (a) and (c) seem feasible to you? That is, do you think Craig could borrow the required capital, and would the company be raising the odds of its bankruptcy to an excessive level in the event of some temporarymisfortune?

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