Question

Major Manuscripts, Inc.

2012 Income Statement
Net sales $7,800
Cost of goods sold 6,865
Depreciation 210
Earnings before interest and taxes $ 725
Interest paid 31
Taxable Income $ 694
Taxes 284
Net income $410
Dividends $ 187

Major Manuscripts, Inc.
2012 Balance Sheet
2012 2012
Cash $ 2,400
Accounts payable $ 1,550
Accounts rec. 880
Long-term debt 300
Inventory 2,700
Common stock $ 3,100
Total $ 5,980
Retained earnings 4,430
Net fixed assets 3,400
Total assets $ 9,380
Total liabilities & equity $ 9,380
Major Manuscripts, Inc., is currently operating at maximum capacity. All costs, assets, and current liabilities vary directly with sales. The tax rate and the dividend payout ratio will remain constant. In 2013, no new equity will be raised and sales are projected to increase by 10 percent. Construct the pro formas for 2013 and answer the following questions (show your work!).
Projected total assets= $______
Projected retained earnings= $______
Additional new debt required= $______

Answer 1

Projected total assets = $10,318

Projected retained earnings = $4,675.30

Additional new debt required = $537.70

Step-by-step explanation:

external financing needed = EFN = [(total assets/total sales) x ($ Δ sales)] - [(total current liabilities/total sales) x ($ Δ sales)] - [profit margin x forecasted sales in $ x (1 - dividend payout ratio)]

total assets = $9,380, projected total assets = $9,380 x 1.1 = $10,318

total sales = $7,800

$ Δ sales = $780

current liabilities = $1,550

profit margin = net income / sales = $410 / $7,800 = 0.052564

forecasted sales = $7,800 x 1.1 = $8,580

dividends payout ratio = dividends / net income = $187 / $410 = 0.4561

EFN = [($9,380/$7,800) x ($780)] - [($1,550/$7,800) x ($780)] - [0.052564 x $8,580 x (1 - 0.4561)]

EFN = $938 - $155 - $245.30 = $537.70

projected retained earnings = current retained earnings - projected net income - projected dividends = $4,430 + $451 - $205.70 = $4,675.30