Table shows the 2010 financial statements for the Executive Cheese Company. Annual depreciation is 10% of fixed assets at the beginning of the year, plus 10% of new investment. The company plans to invest a further $200,000 per year in fixed assets for the next five years and net working capital is expected to remain a constant proportion of fixed assets. The company forecasts that the ratio of revenues to total assets at the start of each year will remain at 1.75. Fixed costs are expected to remain at $53, and variable costs at 80% of revenue. The company’s policy is to pay out two-thirds of net income as dividends and to maintain a book debt ratio of 20%.

a. Construct a model for Executive Cheese like the one in Tables 29.8–29.10.

b. Use your model to produce a set of financial statements for2011.

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Income Statement Revenue Fixed costs Variable costs (80% of revenue) Depreciation Interest (at 1 1.8%) Taxes (at 40%) Net income $1,785 53 1,428 80 24 80 120 Balance Sheet, Year-end 2010 2009 Net working capital Fixed assets $ 400 800 $1,200 S 340 680 1,020 Total assets Liabilities: $ 240 960 $1,200 S 204 816 1,020 Debt Book equity Total liabilities Sources and Uses Sources: Net income Depreciation Borrowing Stock issues S120 80 36 104 S340 Total sources S 60 200 Increase in net working capital Dividends Total uses S340