Linens & Things, Inc. Linens and Things is a distributor of all sorts of househo

Question

Linens & Things, Inc. Linens and Things is a distributor of all sorts of household items with non-seasonal sales. The time is Dec 31st year 2017. The company is considering certain changes for the year 2018. As a financial consultant you are asked to calculate the pro-forma income statement and balance sheet for 2018 to estimate the amount of bank loan needed to implement these policy changes. Policy Changes ' Management expects inventory to equal 60 days cost of goods sold by year end. Cost of goods sold is expected to be 70% of sales. Management expects that accounts receivable to be 50 days of sales in 2018. All sales are credit sales. The company's suppliers provide discount of 2% if the company pays back in 10 days and require the full amount if the company pays in 30 days. Currently company is not paying on time but considering changing this policy as explained in question 1 below Management decided that the company needs to hold larger cash balance of 3,500 for . emergencies. Other information provided are: Company pays an annual interest rate of 8% on its bank loan. Assume interest expense for 2018 is equal to loan amount at the end of 2017 multiplied by the interest rate. . Tax rate is 0.45, A year has 365 days.

Explanation / Answer

Forecast (all fig. in '000s) 2018 Income Statement Sales 50000 COGS (50000*70%) -35000 Gross Profit 15000 Purchase discounts taken(35887.9*2%) 717.76 General S&A exp. -12000 Depn. Exp. -300 Interest exp.(7045.5*8%) -563.64 EBT 2854.12 Taxes(0.45*2877.48)) -1284.35 EAT 1569.76 Dividends -1000 Retained Earnings(1582.62-1000) 569.76 Balance sheet As at Dec.31,2018 Cash 3500 Accounts Receivables(50000/365*50) 6849.32 Inventory 5753.42 16102.74 Gross P&E 3500 Acc. Depn. -1175.5 Net P&E 2324.5 Total assets 18427.24 Accounts payable(37056.22/365*30) 3045.72 Taxes due 1295 Wages payable 84 Bank Loan 7099.5 Common stock 3000 Retained Earnings(3333.3+569.76) 3903.06 Total Liabilities & Equity 18427.24 So. Additional bank loan needed 7099.5-7045.5= 54 Beginning Inventory 3697.2 + Purchases 37056.22 -COGS 35000 Ending Inventory(35000/365*60) 5753.42 Accounts payable Beginning balance 1877.4 New credit Purchases 37056.22 Cash paid (plug-in)(incl.disc.) 35887.90 Ending balance(37056.22/365*30) 3045.72

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