Preparing pro forma financial statements (requires Appendix 6.1) Problem 27 presents financial statements for Target Corporation for its fiscal years ending January 31, 2006, 2007, and 2008, as well as financial statement ratios

a. Prepare a set of pro froma financial statements for Target Corporation for fiscal years 2009 through 2013 using the following assumptions:

INCOME STATEMENT

1. Sales grew 12.2% in 2006 and 12.90% in 2007, primarily as a result of increases in the num her of new’ stoics and increases in sales of stores open more than one war. Sales grew only 6.3% in 2008 because of recession conditions Although Target Corporation will continue to increase the number of stores, economic conditions and competition will likely constrain increases in sales. Thus, assume that sales will grow each year between 2009 and 2013.

2. Other revenues, representing interest on outstanding accounts receivable, have been approximately 3% of sales during the last three years. Assume that other revenues will continue at this historical rate.

3. The cost of goods sold to sales percentage increased slightly from 66.1% in 2006 to 68.2% in 2008. Assume that the cost of goods sold to sales percentage will be 68.1% for 2009 to 2013.

4. The selling and administrative expense percentage has increased slightly from 26.1% of sales in 2006 to 26.2% of sales in 2008. Target will realize economies of scale as its growth rate in sales increases to 9% annually. Assume that the selling and administrative expense to sales percentage will be 26.0% for 2009 to 2013.

5. Target Corporation has borrowed using long-term debt to construct new stores. The age interest rate on interest-bearing debt was approximately 4.4% during 2008. Assume this interest rate for all borrowing outstanding (long-term debt. and current portion of long-term debt) for Target Corporation will be 5% for 2009 to 2013. Compute interest expense on the average amount of interest-bearing debt outstanding each year.

6. Target Corporation’s average income tax rate as a percentage of income before income taxes has varied around 38% during the last three years. Assume an income tax rate of 38% of income before income taxes for 2009 to 2013.

7. Target Corporations dividends increased at an average annual rate of 17.9% between 2006 and 2008 Assume that dividends will grow 16% each year between 2009 and 2013.

BALANCE SHEET

8. Cash will be the amount necessary to equate total assets with total liabilities plus shareholders’ equity

9. Accounts receivable will increase at the growth rate in sales.

10. Inventory will increase at the growth rate in sales.

11. Prepayments relate to ongoing operating costs, such as rent and insurance. Assume that prepayments will grow at the growth rate in sales.

12. Property, plant, and equipment grew 12.4% annually during the most recent three years. The construction of new stores will require additional investments in property, plant, and equipment, but not at the growth rate experienced in recent years. Assume that property, plant, and equipment will grow 10% each year between 2009 and 2013.

13. Other assets changed by only a small amount during the last three years. Assume that other assets will remain the same amount for 2009 to 2013 as the amount at the end of 2008.

14. The accounts payable turnover ratio increased from 5.9 in 2006 to 6.4 during 2008. Assume that Target Corporation will increase its accounts payable turnover to 6.5 times per year for 2009 to 2013.

15. The notes to Target Corporation’s financial statements indicate that current maturities of long-term debt on January 31 of each year are as follows: 2008, $1,964 (amount already appears on the January 31, 2008, balance sheet): 2009, $1,951; 2010, $1,251; 2011, $2,236; 2012, $107; 2013, $2,251

16. Other current liabilities relate to ongoing operating activities and are expected to grow at the growth rate in sales.

17. Target Corporation uses long-term debt to finance acquisitions of property, plant. And equipment Assume that long-term debt will decrease by the amount of long-term debt reclassified as a current liability each year and then the remaining amount will increase at the growth rate in property, plant, and equipment. For example, the January 31, 2008, balance sheet of Target Corporation shows the current portion of long-term debt to be $1,964. Target Corporation will repay this amount during 2009. During 2009, Target will $1,951 from long-term debt to current portion of long-term debt (see item 15 above). This will leave a preliminary balance in long-term debt of $14,988 (= $16,939 – $1,951). Target Corporation will increase this amount of long-term debt by the 10% growth rate in property, plant, and equipment. The projected amount for long-term debt on the January 31, 2009, balance sheet is $16,487 (= $14,988 x 1.1).

18. Other noncurrent liabilities include an amount related to retirement benefits and taxes due after more than one year. Assume that other noncurrent liabilities will increase at the growth rate in sales.

19. Assume that common stock and additional paid-in capital will not change.

20. Assume that accumulated other comprehensive income will grow at the growth rate in sales.

STATEMENT OF CASH FLOWS

21. Assume that depreciation expense will increase at the growth rate in property, plant. and equipment.

22. Assume that changes in other noncurrent liabilities and in accumulated other comprehensive income on the balance sheet are operating activities.

23. Assume that the amount for Other Financing Transactions is zero for 2009 to 2013.

b. Describe actions that Target might take to deal with the shortage of cash projected in part a.

c. What are the likely reasons for the projected changes in the rate of return on common shareholders’ equity?