percent of sales/ proforma statements

1

Finance 4310 Project 2

Percent of Sales Technique

Percent of Sales Technique Homework

XYZ Company

Income Statement

For the Year Ended 12/31/xxxx

Sales $235,000

Cost of Goods Sold 192,000

Gross Profit 43,000

Operating Expenses 21,660

EBIT 21,340

Interest Expense 8,720

Taxable Income 12,620

Taxes @ 34% 4,291

Net Income 8,329

Dividend 2,082

Addition to Retained Earnings $6,247

2

XYZ Company Balance Sheet

12/31/xxxx

Assets

Current Assets

Cash $14,400

Accounts Receivable 24,100

Inventory 25,300

Prepaid Items 12,200

Other CA 7.500

Total Current Assets $ 83,500

Net Plant & Equipment 157,300

Total Assets $240,800

XYZ Company Balance Sheet

12/31/xxxx

Liabilities & Equity

Current Liabilities

Accounts Payable $ 14,900

Wages Payable 7,500

Notes Payable 12,400

Taxes Payable 8,400

Total Current Liabilities $ 43,200

Long Term Debt 60,180

Total Liabilities $103,380

Common Stock $ 61,840

Retained Earnings 75,580

Total Liabilities & Equity $240,800

3

Homework Problem, cont’d |The projected sales for the forecast period is $295,000. Assume that the existing profit margin and payout ratio will be maintained in the forecast period. The firm estimates that additional net fixed asset investment of $37,000 will be required during the forecast period. Assume that all current assets are spontaneous except Other Current Assets which is assumed not to change. Assume that all current liabilities except Notes Payable are spontaneous. A. Prepare a pro forma Balance Sheet and pro forma Income Statement. Show the EFR as a plug number on the balance sheet like in the class example.

B. Using the existing financial statements as your basis, estimate firm XYZ’s EFR for the forecast period using the cookbook model. Also using the cookbook equation, how much funding is expected to come from each of the internal sources of funds (change in SL and retained earnings). If firm XYZ must maintain a minimum current ratio of 2.1 and a maximum debt ratio of 0.55, how would you propose the EFR be financed (how much short term debt, long term debt, and equity)? Explain the basis for your financing allocations.

C. Based on your results in part B, prepare a pro forma Sources and Uses of Funds Statement to check the matching principle. Is the matching principle satisfied. Explain.

D. Although the current financial plan does not currently violate the debt ratio or current ratio constraints, what concern might the financial managers have and what changes might they decide to make to the current plan?

Homework Problem, cont’d

Hints:

Pro Forma TA = Existing TA + CA + NFA Max Pro Forma Total Debt = (D.R. Constraint)(Pro Forma TA)

Max Additional TD = Max. Pro Forma TD –Existing TD

Max Additional External TD = Max Additional TD - ΔSL

Pro Forma CA = Existing CA + CA Max Pro Forma CL = Pro Forma CA / CR Constraint

Max Additional CL = Max Pro Forma CL – Existing CL

Max Additional External CL (N/P) = Max Additional CL - SL Additional LTD = Max Addtnl External TD - Max Addtnl External CL

Min Additional External Equity = EFR - Max Additional External TD