Excel Master It$!$ Problem

Financial planning can be more complex than the percentage of sales approach indicates. Often, the assumptions behind the percentage of sales approach may be too simple. A more sophisticated model allows important items to vary without being a strict percentage of sales.

Consider a new model in which depreciation is calculated as a percentage of beginning fred assets and interest expense depends directly on the amount of debt. Debt is still the plug variable. Note that because depreciation and interest now do not necessarily vary directly with sales, the proft margin is no longer constant. Also, for the same reason, taxes and dividends will no longer be a fixed percentage of sales. The parameter estimates used in the new model are:

Cast percentuge $=$ Casta$/$S$$les

Depreciation rate $=$ Depreciation$/$Beqinning fixed asses

Tax rate $=$ Taxes$/$Ner income

Payout Tatio $=$ Dividends$/$Net income

Capiral iolensity taro $=$ Fixed essos$/$Sales

Fixed assets raho $=$ Fixed assets Total susets

The model paramsters can be determined by whatever methods the company deems appropriate. For example, they might be based on average valus for the last several years, industry standards, subjective estimates, or even company targets. Alternatively, sophisticated statistical techniques can be used to estimate them.

The Yasmin Company is preparing its pro forma financial statements for the nest year using this model. The abbreviated financial statements are presented below.

a$.$ Calculate each of the parameters necessary to construct the pro forma balance sheet.

b$.$ Construct the pro forma balance shest. What is the total debt necessary to balance the pro forma balance sheet?

c$.$ In this financial planning model, show that it is possible to solve algebraically for the amount of new borrowing.