Executive Fruit’s financial manager believes that sales in 2015 could rise by as
ID: 2469921 • Letter: E
Question
Executive Fruit’s financial manager believes that sales in 2015 could rise by as much as 20% or by as little as 5%. Assets and costs change in proportion to sales, debt remains constant, and no new equity financing occurs.
Recalculate the first-stage pro forma financial statements under these two growth assumptions and calculate the required external financing (All figures are in thousands). (Enter your answers in thousands.)
Assume any required external funds will be raised by issuing long-term debt and that any surplus funds will be used to retire such debt. Prepare the completed (second-stage) pro forma balance sheet. (Enter your answers in thousands.)
Executive Fruit’s financial manager believes that sales in 2015 could rise by as much as 20% or by as little as 5%. Assets and costs change in proportion to sales, debt remains constant, and no new equity financing occurs.
Explanation / Answer
The problem has indicated Fruit financial Income statement and Balance sheet (projection of assets and liabilities). In 2015 sales is expected to rise by 20% or by 5% . Other related costs will also go up in the same proprtion. It has been stated that assets will also rise in the same proprtion. Both fixed asset and working capital has been changed accordingly. Dividend paid has been kept at the same level. Income tax rate in base year is (352/880)*100=40%. The same rate is applied in 2015. On this basis Income statement and Balance sheet drawn are shown below:
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In second case firm is initially financing the external fund requirement by issuing long term debt. So when there is 20% rise in sale, new asset is now $6,600. It is $1,100 extra. This money has been finaced by debt. Existing intererst rate is 10%. So extra interest on this $1,100 is paid. Impact of it has been shown in recasted income statement. Accordingly new surplus has been found. It is used to repay the debt. Thus at the beginiig of the next year debt balace will reduce by $242
Similarly impacts are shown when sales increased by 5%. The details are shown below:
Income statement Base case 20% growth 5% growth INCXOME STATEMENT Revenue $11,000 13200 11550 Cost of goods sold $9,900 11880 10395 EBIT $1,100 1320 1155 Interest $220 $220 $220 Earning before taxes $880 $1,100 $935 State and Federal tax $352 $440 374 Net income $528 $660 $561 Dividend $352 $352 $352 Retained earning $176 $308 $209 Balance sheet Assets Base case 20% rise 5% rise Net working capital $1,100 1,320 1155 Fixed assets $4,400 5,280 4620 Total assets $5,500 6,600.00 5775 Liabilities ad shareholders equity Long term debt $2,200 $2,200 $2,200 Shareholders equity $3,300 $3,608 $3,509 Total $5,500 $5,808 $5,709 New financing required $792 $66Related Questions
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