Question

Pro forma balance sheet Peabody & Peabody has 2019 sales of $10 million. It wishes to analyze expected performance and financing needs for 2021, which is 2 years ahead. Given the following information, respond to parts a and b.

1. The percent of sales for items that vary directly with sales are as follows: Accounts receivable, 12% Inventory, 18% Accounts payable, 14% Net profit margin, 3%
2. Marketable securities and other current liabilities are expected to remain unchanged.
3. A minimum cash balance of $480,000 is desired.
4. A new machine costing $650,000 will be acquired in 2020, and equipment costing $850,000 will be purchased in 2017. Total depreciation in 2017 is forecast as $290,000, and in 2017 $390,000 of depreciation will be taken.
5. Accruals are expected to rise to $500,000 by the end of 2017.
6. No sale or retirement of long-term debt is expected.
7. No sale or repurchase of common stock is expected.
8. The dividend payout of 50% of net profits is expected to continue.
9. Sales are expected to be $11 million in 2017 and $12 million in 2017.
10. The December 31, 2017, balance sheet follows

Peabody & Peabody Balance Sheet December 31, 2017 ($000)

Assets:

Cash 400
Marketable securities 200
Accounts receivable 1200
Inventories 1800
Total current assets 3600
Net fixed assets 4000
Total assets 7600

Liabilities and Stockholders equity:

Accounts payable 1400
Accruals 400
Other current liabilities 80
Total current liabilities 1880
Long-term debt 2000
Total liabilities 3880
Common equity 3720
Total liabilities and stockholders’ equity $7,600


Required:
a. Prepare a pro forma balance sheet dated December 31, 2017.
b. Discuss the financing changes suggested by the statement prepared in part a.

Answer 1

Peabody & Peabody

a. Peabody & Peabody

Pro Forma Balance Sheet

December 31, 2021 ($000)

Cash 480

Marketable securities 200

Accounts receivable 1,440

Inventories 2,160

Total current assets 4,280

Net fixed assets 4,820

Total assets 9,100

Liabilities and Stockholders equity:

Accounts payable 1,680

Accruals 500

Other current liabilities 80

Total current liabilities 2,260

Long-term debt 2,000

Total liabilities 4,260

Common equity 3,900

Total liabilities and stockholders’ equity $8,160

Required Finance 940

b. From the statement prepared in part a, it is clear that Peabody & Peabody requires new financing of $940,000 for 2020 to meet the projected assets base.

Step-by-step explanation:

a) Data and Calculations:

2019 Sales = $10 million

Pro Forma Balance Sheet

December 31, 2017 ($000)

Assets:

Cash 400

Marketable securities 200

Accounts receivable 1,200

Inventories 1,800

Total current assets 3,600

Net fixed assets 4,000

Total assets 7,600

Liabilities and Stockholders equity:

Accounts payable 1,400

Accruals 400

Other current liabilities 80

Total current liabilities 1,880

Long-term debt 2,000

Total liabilities 3,880

Common equity 3,720

Total liabilities and stockholders’ equity $7,600

Purpose: To analyze expected performance and financing needs for 2021.

1. Percent of Sales ($12 million)

Accounts receivable, 12% $1,440

Inventory, 18% $2,160

Accounts payable, 14% $1,680

Net profit margin, 3% $360

2. Market securities $200

3. Cash balance (desired minimum) $480

4. Net fixed assets 4,000

New equipment in 2020 650

Depreciation, 2020 (290)

New equipment in 2021 850

Depreciation, 2021 (390)

Net fixed assets $4,820

5. Accruals $500

8. Dividend payout = 50% of $360 = $180

Retained Earnings (current) = $180

Common Equity:

2019 3,720

Income 180 (Retained Earnings)

2020 3,900