Executive Fruit’s financial manager believes that sales in 2015 could rise by as
ID: 2499979 • 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
Ans 1 Base case As a propotion to sales 20% 5% Revenue 6000 100% 7200 6300 Cost of goods sold 5400 90% 6480 5670 EBIT 600 10% 720 630 Interest 120 2% 120 120 Earnings before taxes 480 600 510 State and federal tax 192 240 204 Net Income 288 360 306 Dividend 192 2/3 of net income 240 204 Retained Earnings 96 120 102 Assets Net Working capital 600 10% 720 630 Fixed Assets 2400 40% 2880 2520 Total Assets 3000 50% 3600 3150 Liabilities and shareholders' equity Long-term debt 1200 1200 1200 Shareholders' equity 1800 1920 1902 Total liabilities and shareholders' equity 3000 3120 3102 Required external financing 480 48 Ans 2 Assets Net Working capital 600 10% 600 528 Fixed Assets 2400 40% 2880 2520 Total Assets 3000 50% 3480 3048 Liabilities and shareholders' equity Long-term debt 1200 1200 1200 Additional Longterm Debt 480 48 Less Repayment -116.16 -101.616 Shareholders' equity 1800 1916.16 1901.616 Total liabilities and shareholders' equity 3000 3480 3048 0 0 Workings EBIT 600 0.1 720 630 Interest 120 0.02 120 120 Additional interest (Additional Borrowings*4%) 19.2 1.92 Earnings before taxes 480 580.8 508.08 State and federal tax 192 232.32 203.232 Net Income 288 348.48 304.848 Dividend 192 2/3 of net income 232.32 203.232 Retained Earnings 96 116.16 101.616 Debt Repayment adjusted to Net working capital Assumed Debt availed in the beginning
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