Reference no: EM132761623
Using the following income statement, balance sheet and additional information complete the tasks mention below.
Income Statement
Sale 4,200
Operating costs 3,780
EBIT 420
Interest 120
EBT 300
Taxes (40%) 120
Net Income 180
Dividends 0
Addition to retrained earnings 180
Balance Sheet
Cash and marketable securities 42
Accounts receivable 336
Inventories 441
Current Assets 819
Net fixed assets 2,562
Total Assets 3,381
Accounts payable and accruals 168
Notes payable 250
Current liabilities 418
Long term debt 700
Common stock 400
Retained earnings 1863
Total liabilities and equity 3,381
In developing its forecast for the upcoming year, the company has assembled the following information:
- Sales are expected to increase 8 % this upcoming year.
- Operating costs are expected to remain at 90% of sales.
- Cash and marketable securities are expected to remain at 1% of sales
- Accounts receivable are expected to remain at 8% of sales
- Due to excess capacity the company expects that its year end inventories will remain at current levels.
- Fixed assets are expected to remain at 61% of sales
- Spontaneous liabilities (accounts payable and accruals) are expected to increase at the same rate as sales.
- The company will continue to pay a zero dividend, and its tax rate will remain at 40%.
- The company anticipates that any additional funds needed will be raised in the following manner: 25% notes payable, 25% long-term debt, and 50% common stock.
Problem 1. Based on the assumptions listed above, construct Pro forma income statement and balance sheet. Assume that there are no financial feedback effects. (That is assume interest will remain unchanged even though the company may increase its debt).
Problem 2. Based upon this forecast, describe changes from the prior year that should expect in its return on equity, inventory turnover ratio and profit margin.
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