Winter 2023 Assignment 1 Additional Funds Needed Garlington Technologies Inc.'s 2021 financial statements are shown below. Garlington Technologies Inc.: Balance Sheet as at December 31, 2021 Cash $180,000 Accounts payable $360,000 Receivables 360,000 Notes payable 156,000 Inventories 720,000 Accruals 180,000 Total current assets 1,260,000 Total current liabilities 696,000 Fixed assets 1,440,000 Common stock 1,800,000 Retained earnings Total assets $2,700,000 Total liabilities and equity 204,000 $2,700,000 Garlington Technologies Inc.: Income Statement for December 31, 2021 Sales $3,600,000 Oneration nete Garlington Technologies Inc.: Income Statement for December 31, 2021 Sales $3,600,000 Operating costs 3,279,720 EBIT 320,280 Interest 18,280 EBT 302,000 Taxes (40%) 120,800 Net income Dividends $181,200 $100,000 a. Suppose that in 2022 sales increase by 10% over 2021 sales and that 2022 dividends will increase to $112,000. Construct the pro forma financial statements using the forecasted financial statement method. Assume the firm operated at full capacity in 2021. Use an interest rate of 13%, and assume that any new debt will be added at the end of the year (so forecast the interest expense based on the debt balance at the beginning of the year). Cash does not earn any interest income. Assume that the AFN will be in the form of notes payable. Sales Garlington Technologies Inc. Pro Forma Income Statement December 31, 2022 2021 $3,600,000 Operating costs 3,279,720 Forecast Basis: 1.10 x Sales21 0.911 Sales22 Additions 2022 3.960,000 3607 560 a. Suppose that in 2022 sales increase by 10% over 2021 sales and that 2022 dividends will increase to $112,000. Construct the pro forma financial statements using the forecasted financial statement method. Assume the firm operated at full capacity in 2021. Use an interest rate of 13%, and assume that any new debt will be added at the end of the year (so forecast the interest expense based on the debt balance at the beginning of the year). Cash does not earn any interest income. Assume that the AFN will be in the form of notes payable. Garlington Technologies Inc. Pro Forma Income Statement December 31, 2022 2021 Forecast Basis Sales $3,600,000 1.10 x Sales21 Operating costs 3,279,720 0.911 x Sales22 EBIT 320,280 Interest 10,200 0.13 x Debta EST 302,000 Taxes (40%) 120,800 Net income $181,200 Dividends: $100,000 Set by management Addition to RE: $73,200 Additions 2022 $ 3,960,000 3,607,560 352,440 $ $ Garlington Technologies Inc. Pro Forma Balance Statement December 31, 2022 Forecast Basis % 2022 Sales Additions 0.05 2022 2021 Cash $180,000 360.000 AFN Effects With AFN 2022 $198,000 Garlington Technologies Inc. Pro Forma Balance Statement December 31, 2022 2021 Forecast Basis % 2022 Sales Cash $180,000 0.05 Receivables 360,000 0.10 Inventories 720,000 0.20 Total current assets 1,260,000 Fixed assets 1,440,000 0.40 Total assets $2,700,000 Accounts payable $360,000 0.10 Notes payable 156,000 Accruals 180,000 0.05 Total current liabilities 696,000 Common stock 1,800,000 Retained earnings 204,000 Total lab. and equity $2,700,000 Additions 87,217+ 2022 AFN Effects With AFN 2022 $198,000 396,000 792,000 1,386,000 1,584,000 $396,000 +128,783 284,783 198,000 870,783 1,800,000 291,217 $ AFN- $128,783 b. Below is some additional information on Garlington: Current ratio Return on equity Earnings per share Dividends per share 2021 1.81x 9% $1.68 $1 Number of common shares outstanding 108,000 Common share price $18 1. Calculate the company's 2022 current ratio, ROE, EPS, and DPS based on the expansion and financing as in part a. Current ratio X Return on equity Earnings per share $1 Dividends per share $ %6 Dividends per share=$ II. Because of an agreement with their lender, Garlington's current ratio cannot drop below 1.7x or it will violate a debt covenant. How much can the company increase its notes payable and still not violate its minimum current ratio? Increase in notes payables[ III. Assume that Garlington increases its notes payable to the maximum allowed under its current ratio restriction and issues stock (at the beginning of the year) to raise the remaining funds required. Calculate the company's ROE, EPS, and DPS. ROE- EPS $ DPS-$ IV. Recalculate Garsington's ROE, EPS, and DPS if all the additional financing was obtained through the sale of new common stock. ROE- EPS $ OPS $