Question

1. Develop pro forma financial statements for 2020 on the form provided. Compute interest as if the Bank Loan and the LT Debt were reduced on January 1, 2020, so interest is based on your new year-end loan amounts for the entire year. (8 points)
2. Will the Bank Loan increase or decrease by the end of 2020? What changes contribute to the change in the bank loan; that is, what were the primary uses and sources of cash that caused the bank loan to change? (2 points)

Assumptions (all numbers in thousands)

•      Sales will decrease 10% in 2020

•      COGS will increase to 68% of Sales in 2020.

•      GA&S will increase to $150,000 in 2020.

•      In 2020, depreciation expense will be $30,000, no assets will be sold and $18,000 of new assets will be purchased.

•      The bank loan has an interest rate of 5.6% and the Long-term Debt (LTD) has an interest rate of 7.2%. LTD will be reduced by $90,000 during 2020. Another $90,000 payment will be due in 2021.

•      The tax rate is 30%.

• Inventory will be reduced to $450,000 during 2020.

•      Cash, A/Receivable and A/Payable will be the same % of sales in 2020 as they were in 2019. The minimum cash balance is 2% of Sales.

•      All earnings are retained to finance growth (No dividends are paid).

• Assume Cash is kept at its minimum level as long as there is a loan outstanding.

Two Season Mountain Sports

December 31

2019 Actual and 2020 Pro Forma

Income Statement	2019	2020 Pro Forma
Sales	820,000.00
COGS	524,800.00
Gross Margin	295,200.00
GA&S Expense	145,000.00
Interest Expense	30,000.00
Depreciation Expense	35,000.00
Taxable Income	85,200.00
Taxes	25,560.00
Net Income	59,640.00
Balance Sheet
Assets	2019	2020 Pro Forma
Cash	16,400.00
A/Receivables	24,600.00
Inventory	574,000.00
Total Current Assets	615,000.00
Net Fixed Assets	120,000.00
Total Assets	735,000.00
Liabilities & Equity	2019	2020 Pro Forma
A/Payable	52,480.00
Bank Loan (5.6%)	73,120.00
Current Portion LT Debt	90,000.00
Total Current Liabilities	215,600.00
Long-term Debt (7.2%)	270,000.00
Common Stock	24,000.00
Retained Earnings	225,400.00
Total Liabilities & Equity	735,000.00

Answer 1