Consider the following income statement for the Heir Jordan Corporation: A 20 pe

Question

Consider the following income statement for the Heir Jordan Corporation: A 20 percent growth rate in sales is projected. Prepare a pro forma income statement assuming costs vary with sales and the dividend payout ratio is constant. What is the projected addition to retained earnings? From the income statement provided in Question 3 and the balance sheet provided below, prepare a pro forma income statement and balance sheet showing EFN, assuming a 15 percent increase in sales and no new external debt or equity financing.

Explanation / Answer

1. pro forma income statement

Addition to retain earning= net income- dividends

                                         = 8632.8- 2426= $ 6,206.8

2. pro forma income statement with 15 % increase in sales

Dividends= $ 2,426

Addition to retained earnings= $ 5,543.5

pro forma balance sheet-

EFN=( A0/S0)( S1-S0)-( L0/S0) (S1-S0)- PM*S1 *b

A0= Assets at time 0 which directly varies with sales

L0= liabilities at time 0 which vary directly with sales

PM= profit margin

b= retention ration= addition to retained earning/ net income

EFN= (47,050/ 24,000)* (27,600- 24,000) - (30000/24,000)*(27600- 24000) - (7969.5/24000)*27600*5543.5/7969.5

   = 7057.50 - 4500 - 6375= - 3817.5

sales 28800 costs ( 13500/24000)*28800 15,720 Taxable income 13,080 Taxes (34%) 4,447.2 Net income 8,632.8

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