Question

Pro Forma Statements and Ratios Cavuto makes bulk purchases of men's and women's shoes, stocks them in conveniently located warehouses, and ships them to its chain of retail stores. Cavuto's balance sheet as at December 31, 2015, is shown here (millions of dollars).

Cash Stevens Textile: Balance Sheet as at December 31, 2015 (Thousands of Dollars) $ 1,080 Accounts payable $ 4,320 Receivables 6,480 Accruals 2,880 Inventories 9,000 Notes payable 2,100 Total current assets 16,560 Total current liabilities 9,300 Net fixed assets 12,600 Mortgage bonds 3,500 Common stock 3,500 Retained earnings 12,860 Total assets $29,160 Total liabilities and equity $29,160 Stevens Textile: Income Statement for December 31, 2015 (Thousands of Dollars) Sales $36,000 Operating costs 32,440 Earnings before interest and taxes 3,560 Interest 460 Earnings before taxes 3,100 Taxes (40%) 1,240 Net income $ 1,860 Dividends (45%) $ 837 Addition to retained earnings $ 1,023

Sales for 2015 were $350 million, while net income for the year was $14.35 million. Cavuto paid dividends of $5.74 million to common shareholders. The firm is operating at full capacity. Assume that all ratios remain constant.

1. If sales are projected to increase by $70 million, or 20%, during 2016, use the AFN equation to determine Cavuto's projected external capital requirements.
2. Using the AFN equation, determine Cavuto's self-supporting growth rate. That is, what is the maximum growth rate the firm can achieve without having to employ external funds?
3. Construct Cavuto's pro forma balance sheet for December 31, 2016. Assume that all external capital requirements are met by bank loans and are reflected in notes payable. Assume the company's profit margin and dividend payout ratio remain constant.

Answer 1

Cavuto's Projected External Capital Requirement:

AFN = Current level of assets*[Percentage increase in sales]-current level of liabilities*[percentage increase in sales]-new level of sales*Profit Margin*Retention rate.

**Profit Margin = Net Income/Net Sales = $14.35/$350 = 4.1%

**Retention rate = (1- 0.55) = 45%

AFN = (16560*20%) - (9300*20%)-42000*0.041*0.45

= 3312-1860-775

= 677

Self Supporting Growth Rate

=M (1-POR)(S₀)/A₀