FINANCE-Finance 4310 Class Problem Percent of Sales Technique

Finance 4310Class ProblemPercent of Sales TechniquePercent of Sales Technique HomeworkXYZ CompanyIncome StatementFor the Year Ended 12/31/xxxxSalesCost of Goods SoldGross ProfitOperating ExpensesEBITInterest ExpenseEBTTaxes @ 39%Net IncomeDividendAddition to Retained Earnings$140,000117,00023,00012,83010,1704,6105,5602,1683,3921,018$2,3741XYZ CompanyBalance Sheet12/31/xxxxAssetsCurrent AssetsCashAccounts ReceivableInventoryPrepaid ItemsOther CATotal Current AssetsNet Plant & EquipmentTotal Assets$7,50012,10010,4005,9004,300$40,20082,300$122,500XYZ CompanyBalance Sheet12/31/xxxxLiabilities & EquityCurrent LiabilitiesAccounts PayableWages PayableNotes PayableTaxes PayableTotal Current LiabilitiesLong Term DebtTotal LiabilitiesCommon StockRetained EarningsTotal Liabilities & Equity$7,2003,6005,4004,200$20,40035,700$56,10028,70037,700$122,5002Homework Problem, cont’d|The projected sales for the forecast period is $165,000. Assume that the existing profitmargin and payout ratio will be maintained in the forecast period. The firm estimates thatadditional net fixed asset investment of $18,000 will be required during the forecast period.Assume that all current assets are spontaneous except Other Current Assets which isassumed not to change. Assume that all current liabilities except Notes Payable arespontaneous.A. Prepare the pro forma Balance Sheet and pro forma Income Statement. The EFR will bea plug number that makes the balance sheet balance like in the class example.B. Using the existing financial statements as your basis, estimate firm XYZ’s EFR for theforecast period again, but this time using the cookbook model. Also based on the cookbookequation, 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 ratioof 1.8 and a maximum debt ratio of 0.50, how would you propose the EFR be financed(how much short term debt, long term debt, and equity)?C. Based on your results in part B, prepare a Pro Forma Sources and Uses of FundsStatement to reflect the financing allocations that you decided on in part B. The only formatchange required is to break the total EFR down into the amounts of short term debt, longterm debt, and new equity. You will have to use the numbers for CA, SL, addition toR.E., and EFR that you calculated in part B to make it balance, since they may be slightlydifferent than those from part A. Explain the basis for your financing allocations.Homework Problem, cont’dHints:Pro Forma TA = Existing TA + CA + NFAMax Pro Forma Total Liabilities = (D.R. Constraint)(Pro Forma TA)Max Additional TL = Max. Pro Forma TL –Existing TLMax Additional External Debt = Max Additional TL – ΔSLMin Additional External Equity = EFR – Max Additional External DebtPro Forma CA = Existing CA + CAMax Pro Forma CL = Pro Forma CA / CR ConstraintMax Additional CL = Max Pro Forma CL – Existing CLMax Additional Notes Payable (N/P) = Max Additional CL – SLAdditional LTD = Max Additional External Debt – Max N/P3Check AnswersPro forma EFR = $18,589Cookbook EFR = $18,941Financing Plan with constraints at their limitsAdditional Notes Payable: $2,820Additional LTD: $11,861Additional Equity: $4,260A more conservative plan would use less debt,more equity.4

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