BALANCE SHEET Cash $ 340,000 Accounts Payable $ 2,720,000 Receivables 4,200,000 Accruals 980,000 Inventories 4,960,000 Notes Payable

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Question:

BALANCE SHEET

Cash $ 340,000 Accounts Payable $ 2,720,000

Receivables 4,200,000 Accruals 980,000

Inventories 4,960,000 Notes Payable 1,300,000

Total Current Assets $ 9,500,000 Total Current Liabilities $ 5,000,000

Net Fixed Assets 2,500,000 Long –term Debt 2,000,000

Common Stock 3,800,000

Retained Earnings 1,200,000

Total Assets $12,000,000 Total Liabilities and Equity $12,000,000

INCOME STATEMENT

Sales $36,500,000

Less: Operating Costs 29,200,000

EBIT $ 7,300,000

Less: Interest 500,000

EBT $ 6,800,000

Less: Taxes (40%) 2,720,000

Net Income $ 4,080,000

Less: Dividends 3,500,000

Additions to Retained Earnings $ 580,000

You expect sales to increase 25% next year.
Assume you are currently operating at 90% capacity
Interest expense next year will be 16% of any interest-bearing debt balance at the beginning of the year
Dividends will double next year
Operating costs are 25% fixed and 75% variable
Days Sales Outstanding are expected to increase by 7 days next year
Days Payables Outstanding are expected to decrease by 4 days next year
Cash is expected to remain constant next year

Using a pro forma income statement to estimate the additions to retained earnings, how much external funds do you project needing to support the 25% sales growth? If the additional funds were raised using long-term debt, immediately, how would that affect your additional funds estimate? If there is a funding surplus, excess funds are used immediately to pay off – in this order – long-term debt, then notes payable and then common stock until the funds are exhausted. Project your income statement and balance sheet using two passes: first estimate and second estimate adjusting for funding changes.