The below table summarizes the 2017 income statement and end-year balance sheet

Question

The below table summarizes the 2017 income statement and end-year balance sheet of Drake's Bowling Alleys. Drake's financial manager forecasts a 15% increase in sales and costs in 2018. The ratio of sales to average assets is expected to remain at 0.40 Interest is forecasted at 3% of debt at the start of the year. Income Statement $1,400 (40% of average assets) Sales Costs Interest Pretax profit Tax Net income 700 (50% of sales) 19 (3% of debt at start of year) $ 681 136 (20% of pretax profit) $ 545 a Assets at the end of 2016 were $3,800,000 Debt at the end of 2016 was $640,000 Balance Sheet $1,200 $ 800 400 Assets Debt Equity Total $1,200 $1,200 a. What is the implied level of assets at the end of 2018? (Enter your answer in thousands.)

Explanation / Answer

the ratio of average assets to sales for 2017 was =1,400 x 2/ (3,800+,1200) = 2,800 / 5,000 = 56% and not 40% as as stated.

a. implied Assets at the end of 2018 = $6850

Working:

b.

Working:

Sales in 2017 1400 Expected growth 15% Expected sales in 2018 1610 Ratio of sales to average assets 40% Average Assets 4025 Beginning Assets 1200 Ending Assets 6850 ( 4025 x 2 - 1200)

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