Question

Financing Deficit Garlington Technologies Inc.'s 2019 financial statements are shown below: Income Statement for December 31, 2019 Sales Operating costs EBIT Interest $4,000,000 3,200,000 $ 800,000 120,000 $ 680,000 Pre-tax earnings Taxes (25%) 170,000 Net income 510,000 Dividends $ 190,000 Balance Sheet as of December 31, 2019 Cash $ 160,000 Accounts payable $ 360,000 Receivables 360,000 Line of credit Inventories 720,000 Accruals 200,000 Total CA $1,240,000 Total CL $ 560,000 Fixed assets 4,000,000 Long-term bonds 1,000,000 Total Assets $5,240,000 Common stock 1,100,000 RE 2,580,000 Total L&E $5,240,000 Suppose that in 2020 sales increase to $4.6 million and that 2020 dividends will increase to $228,000. Forecast the financial statements using the forecasted financial statement method. Assume the firm operated at full capacity in 2019. The long-term bonds have an interest rate of 11%. New financing will be with a line of credit. Assume it will be added at the end of the year. Cash does not earn any interest income. Enter your answers as positive values. Do not round intermediate calculations. Round your answers to the nearest dollar

Answer 1

Answer:-

Growth rate in sales = (4.6-4.0)/4.0 =15% (sales figures in Million $)

Line of credit is the balancing figure and will be calculated last after all balance sheet items is calculated.

Garlington Technologies Inc.
Pro Forma Income Statement
31-Dec-20	Linkage	$
Sales	A = 4.6 million	4,600,000
Operating costs	B = 80% x A	3,680,000	(last year operating cost is 80% of sales(3,200,000/4,000,000)
EBIT	C = A - B	920,000
Interest	D = 11% x 1,000,000 of Long term bonds	110,000
Pre-tax earnings	E = C - D	810,000
Taxes (25%)	F = 25% x E	202,500
Net income	G = E - F	607,500
Dividends:	H	228,000
Addition to RE:	I = G - H	379,500

Pro Forma Balance Statement
31-Dec-20
Cash	J = 160,000 x (1 + 15%)	184,000
Receivables	K = 360,000 x (1 + 15%)	414,000
Inventories	L = 720,000 x (1 + 15%)	828,000
Total current Asstes	M = J + K + L	1,426,000
Fixed assets	N = 4,000,000 x (1 + 15%)	4,600,000
Total assets	O = M + N	6,026,000
Accounts payable	P = 360,000 x (1 + 15%)	414,000
Line of credit	Q = Balancing figure	322,500
Accruals	R = 200,000 x (1 + 15%)	230,000
Total current liabilities	S = P + Q + R	966,500
LT bonds	T = last year figure	1,000,000
Common stock	U = Last year figure	1,100,000
Retained earnings	V = 2,580,000 + I calculated above	2,959,500
Total L&E	W = S + T + U + V	6,026,000