The 2009 balance sheet and income statement for the Woods Company are shown here:

Woods Company: Income Statement for the Year Ending December 31, 2009 ($ thousands)
Sales.................................................................... $ 8,000
Operating costs................................................... (7,450)
Earnings before interest and taxes.................... $ 550
Interest................................................................... ( 150)
Earnings before taxes.......................................... $ 400
Taxes (40%)............................................................ ( 160)
Net income............................................................ $ 240
Per-Share Data
Common stock price.......................................... $ 16.96
Earnings per share (EPS)...................................... $ 1.60
Dividends per share (DPS)................................... $ 1.04

a. The firm operated at full capacity in 2009. It expects sales to increase by 20 percent during 2010 and expects 2010 dividends per share to increase to $1.10. Use the projected balance sheet method to determine how much outside financing is required, developing the firm€™s pro forma balance sheet and income statement, and use AFN as the balancing item.
b. If the firm must maintain a current ratio of 2.3 and a debt ratio of 40 percent, how much financing, after the first pass, will be obtained using notes payable, long-term debt, and common stock?
c. Construct the second-pass financial statements incorporating financing feedbacks, using the ratios in part b. Assume that the interest rate on debt averages 10 percent.

Transcribed Image Text:

Woods Company: Balance Sheet as of December 31, 2009 ($ thousands) $ 160 $ 80 Accounts payable Accruals Notes payable Current liabilities Long-term debt Common stock Retained earnings Total liabilities and Cash Accounts receivable Inventories Current assets Fixed assets 240 40 720 $1,040 3,200 252 $ 452 1,244 1,605 939 Total assets $4,240 equity $4,240