Table 29.14 contains financial statements for Dynastatics Corporation. Although the company has not been growing, it now plans to expand and will increase net fixed assets (that is, assets net of depreciation) by $200 per year for the next five years. It forecasts that the ratio of revenues to total assets will remain fixed at 1.5. Annual depreciation is 10 percent of fixed assets at the start of the year. Fixed costs are expected to remain at $56, and variable costs, at 80 percent of revenue. The company's policy is to pay out two-thirds of net income as dividends and to maintain a book debt ratio of 25 percent of total capital.

a. Produce a set of financial statements for 2007. Assume that net working capital will equal 50 percent of fixed assets.

b. Now assume that the balancing item is debt and that no equity is to be issued. Prepare a completed pro forma balance sheet for 2007. What is the projected debt ratio for2003?

Transcribed Image Text:

Income Statement $1,800 Revenue Fixed costs 56 Variable costs (80% of revenue) Depreciation Interest (8% of beginning-of-year debt) Taxable income 1,440 80 24 200 Taxes (at 40%) 80 $ 120 Net income Dividends Retained earnings $80 $40 Balance Sheet, Year-end 2002 2001 Assets: $ 400 800 $1,200 $ 400 800 $1,200 Net working capital Fixed assets Total assets Liabilities and shareholders' equity: Debt Equity Total liabilities and shareholders' equity $ 300 $ 300 900 $1,200 900 $1,200