Question

CASE 1 (35 points) The 2019 financial statements for Assol Corporation follow. Assets, costs, and current liabilities are proportional to sales. Long-term debt and equity are not. The company maintains a constant 40 percent dividend payout ratio. As with every other firm in its industry, next year's sales are projected to increase by exactly 15 percent. The firm is operating at full capacity and no new debt or equity is issued. Income Statement Balance Sheet Sales $7.900 Current assets $3,900 $ 2.100 Current liabilities Long-term debt Costs 5.500 Fixed assets 8,600 3,700 Taxable income $2,400 Equity 6.700 Taxes (25%) 600 Total $12.500 Total $12.500 Net income $1,800 Instructions: 1. Prepare Proforma Income Statement for 2020. Calculate Dividends and Addition to retained earnings in 2020. (10 points) 2. Prepare Proforma Balance Sheet for 2020. (10 points) 3. Calculate the amount of external financing needed in 2020. What financing options are available for the company? (5 points) 4. Assuming that the company operated at 75% capacity in 2019, re-calculate Proforma Total Assets in 2020. (5 points) 5. How would you approach predicting next year's sales? Explain. (5 points)

Answer 1

1 Assol Corporation Proforma Income Statement 2019 2020 Sales $7,900 $9,085 Cost $5,500 $6,325 Taxable income $2,400 $2,760 Taxes at 25% $600 $690 Net Income $1,800 $2,070 Dividend at 40% Addition to RE $720 $1,080 $828 $1,242 2 Current Assets Fixed Assets Assol Corporation Proforma Balance Sheet $4,485 Current liabilities $9,890 Long-term debt Equity $14,375 Total $2,415 $4,018 $7,942 $14,375 Total 3 Amount of External funds needed in 2020 2019 2020 Current Assets $3,900 $4,485 15% increase Fixed Assets $8,600 $9,890 15% increase needed since no capacity available Total assets $12,500 $14,375 Current liabilities Long-term debt Equity Total liabilities & Equity $2,100 $3,700 $6,700 $12,500 $2,415 15% increase $3,700 $7,942 Addition of RE $14,057 External funds needed $318 (Total assets-Total Liabilities) Financing options: Raise long term debt Issue equity 4 Amount of External funds needed in 2020 2019 2020 Current Assets $3,900 $4,485 15% increase Fixed Assets $8,600 $8,600 No addition needed as capacity is available for increased sales Total assets $12,500 $13,085 Fixed assets = $8,600/75% = $11,467 Increase in sales =$1,185 5 Predicting sales next year i) Based on past performance ii) Competition impact iii) General economy conditions like GDP growth, employment, etc iv) Demand for products v) Market share