Consider the Industrial Supply Company example (Table 4.4) again. Assume that th

Question

Consider the Industrial Supply Company example (Table 4.4) again. Assume that
the company plans to maintain its dividend payments at the same level in 2011 as
in 2010. Also assume that all of the additional financing needed is in the form of
short-term notes payable. Determine the amount of additional financing needed
and pro forma financial statements (that is, balance sheet, income statement, and
selected financial ratios) for 2011 under each of the following conditions:
Increase in Sales Increase in Expenses
a. $3,750,000 $3,750,000
b. $3,000,000 $2,800,000
c. $4,500,000 $4,000,000

Explanation / Answer

Additional Financing = [(A/S)(DS) - (CL/S)(DS)] - [EAT - D] Needed A = $7,500,000 S = $15,000,000 CL = $1,500,000 DS = $3,750,000 D = $250,000 EAT = $18,750,000 - $18,000,000 = $750,000 AdditionalFinancing Needed =[(7,500,000/15,000,000)(3,750,000) - (1,500,000/ 15,000,000)(3,750,000)] - [750,000 - 250,000] = $1,000,000

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