A firm aims to achieve a return on investment (ROI) of 25%. Compile a pro forma statement
Question:
A firm aims to achieve a return on investment (ROI) of 25%. Compile a pro forma statement of financial performance and statement of financial position based on the budgeted figures below: The marketing department estimates the firm can achieve the following sales:
Probability
Sales
50%
R36 066 880
50%
R44 500 620
The marketing department limits marketing expenses to 5% of sales. The credit department aims to limit bad debt to 2% of sales. The cost of goods sold is 50% of sales. HR has been provided with the guideline of limiting salaries and HR expenses to 25% of sales. Courier and delivery expenses are expected to not exceed 1,5% of sales. Other operating expenses (in Rands) are estimated to be the following:
Bank charges
21 587
Consultations
120 000
Depreciation
2 092 000
External service providers
48 000
Fuel
321 000
Insurance
920 000
Internet expenses
12 000
Leased equipment
62 500
Legal costs
225 000
License and fees
18 400
Non-capitalised equipment
22 000
Printing
18 000
Property rentals
186 000
Refreshments & entertainment
28 000
Repairs & maintenance
16 000
Stationery
22 000
Telephone
6 200
Toll fees
3 300
Training & Development
28 000
Travel & subsistence
18 400
Water, electricity, sanitation
72 400
The firm estimates it will have to pay R12 000 in interest. The tax rate is 28% of the earnings before tax.
The financial manager has also prepared the following projections (in Rands):
Non-current assets:
Land & buildings
8 200 900
Equipment
6 250 000
Vehicles
4 210 000
Current assets:
Cash
320 000
Accounts receivable
1 900 000
Inventory
1 450 000
Shareholder’ interest:
Ordinary shares
9 550 000
Retained earnings
4 082 500
Long-term debt
5 383 500
Current liabilities:
Accounts payable
3 250 000
Accruals
150 000
Required
a) Determine the expected earnings after tax.
b) Determine the amount of financing required.
c) If the firm aims to limit the debt ratio to 50%, how much of the new financing should be equity finance and what amount long-term borrowing?
What could the firm do to improve its current ratio to 2:1?
Expert Answer:
a The expected earnings after tax can be calculated as follows Sales R36 066 880 R44 500 620 R80 567 ... View the full answer
Intermediate Accounting
ISBN: 978-0077400163
6th edition
Authors: J. David Spiceland, James Sepe, Mark Nelson
