Reference no: EM132600389
In your accounting course, you learned about the income statement that provides a record of what led to net income for the year. Just as you might develop a forecast of the future year's budget, financial professionals forecast future income by developing a one-year forecast of the firm's income statement, more commonly known as the pro forma income statement. Taken together with assumptions about future assets, liabilities, and retained earnings, one can estimate future long-term financing needs for the corporation.
In addition, provide two or more suggestions on what Arrington, Inc. could do to reduce the forecasted debt financing (the managerial part of financing). Be sure to provide rationales as to why your suggestions will be effective in reducing the forecasted debt financing need.
PRO FORMA INCOME STATEMENT At the end of last year, Roberts Inc. reported the following income statement (in millions of dollars):
Sales $3,000
Operating costs excluding depreciation 2,450
EBITDA $ 550
Depreciation 250
EBIT$ 300
Interest 125
EBT$ 175
Taxes (40%)70
Net income$ 105
Looking ahead to the following year, the company's CFO has assembled this information:
- Year-end sales are expected to be 10% higher than the $3 billion in sales generated last year.
- Year-end operating costs, excluding depreciation, are expected to equal 80% of year-end sales.
- Depreciation is expected to increase at the same rate as sales.
- Interest costs are expected to remain unchanged.
- The tax rate is expected to remain at 40%.
Question 1: On the basis of that information, what will be the forecast for Roberts' year-end net income?
LONG-TERM FINANCING NEEDED
At year-end 2018, total assets for Arrington Inc. were $1.8 million and accounts payable were $450,000.
Sales, which in 2018 were $3.0 million, are expected to increase by 25% in 2019. Total assets and accounts payable are proportional to sales, and that relationship will be maintained; that is, they will grow at the same rate as sales.
Arrington typically uses no current liabilities other than accounts payable.
Common stock amounted to $500,000 in 2018, and retained earnings were $475,000.
Arrington plans to sell new common stock in the amount of $130,000. The firm's profit margin on sales is 5%; 35% of earnings will be retained.
Question 2: What were Arrington's total liabilities in 2018?
Question 3: How much new long-term debt financing will be needed in 2019?