3. Projected financial statements and basic analysis

You are the most creative analyst for Avatar Animators Inc., and your admirers want to see you work your analytical magic once more.

	2016 Actual Results	2017 Initial Forecast
Interest	(320)	(320)
Cost of goods sold	(12,800)	(19,200)
Taxes	(704)	(1,120)
Dividends per share	$29	$29
Gross profit	$3,200	$4,800
Depreciation	(320)	(480)
Earnings per share	$52.8	$84
Net sales	$16,000	$24,000
Addition to retained earnings	$486	$1,110
Earnings before interest and taxes	$2,080	$3,120
Fixed operating costs except depreciation	(800)	(1,200)
Number of common shares (millions)	20.0	20.0
Net income	$1,056	1,680
Earnings before taxes	$1,760	$2,800
Common dividends	(570)	(570)

Which of the following are assumptions made by the initial income statement forecast? Check all that apply.

No excess capacity currently exists.

Avatar Animators Inc. will be issuing additional debt in the coming year.

The forecasted increase in net sales is 50%.

The cost of sales percentage for Avatar Animators Inc. will decrease due to economies of scale.

Avatar Animators Inc. will be issuing additional shares of common stock in the coming year.

Spontaneously generated funds will sufficiently cover any financing needs.

If Avatar Animators Inc. had neither a sufficient amount of excess capacity to handle forecasted increases in operations nor the level of retained earnings required to increase asset levels up to the necessary level for production, this difference would be referred to as and could be acquired in which of the following forms?

	I. Issuing additional common stock
	II. Borrowing from a bank using notes payable
	III. Issuing long-term bonds

I, II, and III

I only

Just III

Just II

I and II

II and III