1. Prepare both the pro forma income statement and the pro forma balance sheet for Sparky.

2. What is the amount of a loan that Frank will need from the bank?

3. Assume that the bank says Frank can have the money and would like to work with him on the type of debt that he will be incurring. The bank says he can have it as a line of credit (see footnote) at 5% interest, a short-term loan of two years at 7% interest, or a five-year loan at 10% interest, or a combination of these types of loans. What would you suggest and why? And remember that since Frank is a sole proprietor, he does not get a paycheck but is instead pay from the profits of the store, which also has to be used to pay back the loan.

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Sparky's Electrical Supply Frank Newman had been an electrician for over twenty years and was anxious to do something where he didn't have to work in attics or crawl spaces any more. He had worked for both big and small firms and one thing that he had noticed was that large firms always had their own inventory of supplies, but small firms were always having to go out and buy things because they couldn't afford, and didn't want, to have a lot of extra things laying around that they weren't using. Essentially, the small firms were buying supplies as they were needed for each job. And Frank (whose nickname was Sparky due to an unfortunate accident very early in his training) wanted to be the one to sell the supplies to these small electrical contractors. The town where Frank lived and worked was a moderate size (about 90,000) that was on a steady growth rate with new businesses coming in and housing being built. There were two of the big DIY-type stores, but Frank knew that the average small electrical contractor didn't use them that much for supplies. Even though the prices for materials was good, the process of buying could take a long time and the purchase had to be paid for right away rather than on a trade account which could be paid once a month. There was only one electrical supply store in town currently, and it was on the west side, while a lot of growth has been on the east side. Frank had saved up $75,000 in a retirement account which he could use to start his own business. He has been talking to a bank about getting a loan to open his new store and the loan officer was quite positive about the possibility of a loan, but she told Frank the bank would need a pro forma income statement and balance sheet to see what his loan needs would be and whether it looked like the business would be successful enough to pay back the loan. The loan officer also reminded Frank that even though the bank wanted this information, the loan would still be one made to Frank personally, so he would be responsible for the payments, even if the business were not successful. Income Statement The SBA office in Frank's town helped him find some information online that would help Frank develop the two statements that the bank needed in order to review a loan application. Based on the size of the store that Frank was considering opening the annual sales should be about $725,000. The cost of good sold (COGS) for these sales would be 59% and the turnover Sparky's Electrical Supply Frank Newman had been an electrician for over twenty years and was anxious to do something where he didn't have to work in attics or crawl spaces any more. He had worked for both big and small firms and one thing that he had noticed was that large firms always had their own inventory of supplies, but small firms were always having to go out and buy things because they couldn't afford, and didn't want, to have a lot of extra things laying around that they weren't using. Essentially, the small firms were buying supplies as they were needed for each job. And Frank (whose nickname was Sparky due to an unfortunate accident very early in his training) wanted to be the one to sell the supplies to these small electrical contractors. The town where Frank lived and worked was a moderate size (about 90,000) that was on a steady growth rate with new businesses coming in and housing being built. There were two of the big DIY-type stores, but Frank knew that the average small electrical contractor didn't use them that much for supplies. Even though the prices for materials was good, the process of buying could take a long time and the purchase had to be paid for right away rather than on a trade account which could be paid once a month. There was only one electrical supply store in town currently, and it was on the west side, while a lot of growth has been on the east side. Frank had saved up $75,000 in a retirement account which he could use to start his own business. He has been talking to a bank about getting a loan to open his new store and the loan officer was quite positive about the possibility of a loan, but she told Frank the bank would need a pro forma income statement and balance sheet to see what his loan needs would be and whether it looked like the business would be successful enough to pay back the loan. The loan officer also reminded Frank that even though the bank wanted this information, the loan would still be one made to Frank personally, so he would be responsible for the payments, even if the business were not successful. Income Statement The SBA office in Frank's town helped him find some information online that would help Frank develop the two statements that the bank needed in order to review a loan application. Based on the size of the store that Frank was considering opening the annual sales should be about $725,000. The cost of good sold (COGS) for these sales would be 59% and the turnover