Reference no: EM132952526
The financial statements for Hotwire Inc. (are provided below). Although the company has not been growing, it now plans to expand and will increase net fixed assets to match the increase in sales.
- Hotwire forecasts that the ratio of Revenues to total assets will remain at 1.5
- Net working capital will equal 50% of the end of year net fixed assets
- Annual depreciation is 10% of net fixed assets at the start of the year
- Fixed Costs are expected to remain at $176,000 and variable costs at 70% of revenue.
- The company's policy is to pay out 2/3 of its net income as dividends
- Maintain a Debt Ratio of 25% of total assets (eg $1,500 x 25% = $375 Debt)
- Revenues are expected to increase by 15% in 2021
REQUIRED:
Problem i) make a Pro-forma Income Statement and Balance Sheet for 2021.
Problem ii) Now assume that the balancing item is debt and that no equity is to be issued. Prepare the Liabilities and Equity portion of the Pro-forma Balance Sheet for 2021. What is the projected debt ratio for 2021?
Hotwire Inc.
Income Statement
for year-ended December 31, 2020
($000's)
Revenue $2,250
Fixed Costs 176
Variable Costs (70% of revenue) 1,575
Depreciation 100
Interest (8% of begin yr. debt) 30
Taxable income 369
Taxes @ 40% 111
Net income $ 258
Dividends 172
Addition to retained earnings 86
Balance Sheet
As at Dec 31, 2020
Assets
Net working capital $ 500
Net fixed assets 1,000 net of depreciation)
Total assets $1,500
Liabilities and shareholder's equity
Debt $ 375
Shareholder's Equity 1,125
Total Liabilities and Shareholder's Equity $1,500