Reference no: EM131969326

Problem

Below are recent financial statements for Vectra Manufacturing.

Income Statement for Year Just Ended

Sales Revenue                  $100,000
Cost of Goods Sold             80,000
Gross Profit                   $ 20,000
Operating Expenses             10,000
Operating Profit                    $ 10,000
Interest Expense                       1,135
Taxable Income                 $ 8,865
Taxes (35%)                       3,546
Net Income                     $ 5,319

Balance Sheet as of End of Year

Cash                 $ 6,000   Accounts Payable               $10,000
Accounts Rec.     15,000   Accruals                  3,700
Inventories        18,000   Line of Credit           8,300
Net fixed assets         51,000   Bonds Payable             18,000
                               Common Stock              30,000
                               Retained Earnings         20,000
Total Assets         $90,000   Total Financing           $90,000

Information and Assumptions

a. A 10 percent decrease in sales is projected for the next year.

b. Cost of Goods Sold, Current Assets, and Current Liabilities are spontaneous and expected to change with sales.

c. 25% of Operating Expenses are fixed, and the rest will vary with sales.

d. The Line of Credit for the next year has been negotiated with a $6,000 limit. The interest rate is 5 percent, unchanged from the previous year.

e. The firm's Bonds are scheduled to mature in 6 years. The coupon rate is 4 percent.

f. The firm's dividend payout ratio has been 50% for several years.

g. No fixed assets will be bought or sold during the year, but net fixed assets will decrease due to depreciation expense of $7,650 scheduled for the next year.

1. Prepare Pro Forma statements for the next year using the information and assumptions provided.

2. Will excess financing be available, or will additional financing be needed?

3. In planning for next year, what actions should your firm consider based on your result to question #2?