Yummy Food's financial manager believes that sales in 20 IS could rise by as much as 20% or by as little as 5%. The planned divitdend payout ratio is 2/3, interest expense is based on the debt at the start of the year and the percentage of sales factors are unchanged.
a. Recalculate the first-stage pro forma financial statements (Table 19.5) for each of these growth rates. How do the forecasted sales growth rates affect the firm's need for external funds?

b. Assume any required external funds will be raised by issuing long-term debt and that any surplus funds will be used to retire debt. Prepare the completed (second-stage) pro forma balance sheet (Table 19.6).

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Pro Forma Income Statement for 2015 Comment 10% higher than 2014 revenue Revenue $2,200 (1,980) Cost of goods sold 10% higher; 90% of sales EBIT 10% higher 220 Interest Unchanged (40) Earnings before taxes EBIT – interest 180 Corporate tax (72) 40% of (EBIT – interest) $ 108 EBIT – interest – taxes Net income $ (72) Dividends 2/3 of net income Addition to retained earnings $ 36 Net income – dividends Pro Forma Balance Sheet as of December 31, 2015 Assets $ 220 Net operating working capital 10% higher; 10% of sales Property, plant, and equipment 10% higher; 40% of sales 880 $ 1,100 Total assets 10% higher Liabilities and Shareholders' Equity $ 400 Long-term debt Temporarily held fixed Increased by addition to retained earnings, Shareholders' equity 636 600+ 36 Total liabilities and shareholders' equity Sum of debt plus equity $ 1,036 Balancing item or plug (=$1,100 – $1,036) Required external financing 64 Pro Forma Balance Sheet as of December 31, 2015 Comment Assets Net operating working capital $ 220 10% of sales Property, plant, and equipment 880 10% higher and 40% of sales Total assets $1,100 10% higher Liabilities and Shareholders' Equity Long-term debt $ 464 16% higher (new borrowing= $64; this is the balancing item) Shareholders' equity $ 636 Increased by 2015 addition to retained earnings Total liabilities and shareholders' $1,100 Again equals total assets equity equity