Question

Financing Deficit

Garlington Technologies Inc.'s 2019 financial statements are shown below:

Income Statement for December 31, 2019

Sales	$4,000,000
Operating costs	3,200,000
EBIT	$  800,000
Interest	120,000
Pre-tax earnings	$  680,000
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	0
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 $4.2 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 14%. 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.

Garlington Technologies Inc. Pro Forma Income Statement December 31, 2020
Sales		$
Operating costs		$
EBIT		$
Interest		$
Pre-tax earnings		$
Taxes (25%)		$
Net income		$
Dividends:		$
Addition to RE:		$

Garlington Technologies Inc. Pro Forma Balance Statement December 31, 2020
Cash		$
Receivables		$
Inventories		$
Total current assets		$
Fixed assets		$
Total assets		$
Accounts payable		$
Line of credit		$
Accruals		$
Total current liabilities		$
LT bonds		$
Common stock		$
Retained earnings		$
Total L&E		$

Answer 1

Growth rate in sales = g = 4.2 / 4.0 - 1 = 14% (the sales figures are in $ million)

Please see the table below. Please see the linkage column to understand the mathematics. Line of credit is the balancing figure and will be calculated last after all other items have been calculated.

Garlington Technologies Inc. Pro Forma Income Statement 31-Dec-20 Sales Operating costs EBIT Linkage A = 4.2 million B = 80% x A C=A-B D = 14% x 1,000,000 of debt E = C-D F = 25% XE G=E-F Interest Pre-tax earnings Taxes (25%) Net income Dividends: Addition to RE: 4,200,000 3,360,000 840,000 140,000 700,000 175,000 525,000 228,000 297,000 I= G-H

Pro Forma Balance Statement 31-Dec-20 Cash Receivables Inventories Total current assets Fixed assets Total assets J = 160,000 x (1 + 14%) K = 360,000 x (1 +14%) L = 720,000 x (1 + 14%) M= J+K+L N = 4,000,000 x (1 + 14%) O = M+N 182,400 410,400 820,800 1,413,600 4,560,000 5,973,600 L Accounts payable Line of credit Accruals Total current liabilities LT bonds Common stock Retained earnings Total L&E P = 360,000 x (1 +14%) Q = Balancing figure R = 200,000 x (1 + 14%) S = P +Q+R T = last year figure U = Last year figure V = 2,580,000 + I calculated W = S +T+U+V 410,400 335,200 228,000 973,600 1,000,000 1,100,000 2,900,000 5,973,600

working method:

R.E = Last year retained earnings + (Net income - Dividend)

= 2580000+ (510000-190000)

= 2580000+ 320000

= 2900000

Q = 5973600 - 410400 - 228000 - 1000000 - 1100000 - 2900000

= 335,200