Finance 4310 Class Problem Percent of Sales Technique

| January 31, 2017

Question
Percent of Sales Technique Homework
XYZ Company
Income Statement
For the Year Ended 12/31/xxxx

Sales
Cost of Goods Sold
Gross Profit
Operating Expenses
EBIT
Interest Expense
EBT
Taxes @ 39%
Net Income
Dividend
Addition to Retained Earnings

$140,000
117,000
23,000
12,830
10,170
4,610
5,560
2,168
3,392
1,018
$2,374

1

XYZ Company
Balance Sheet
12/31/xxxx
Assets
Current Assets
Cash
Accounts Receivable
Inventory
Prepaid Items
Other CA
Total Current Assets
Net Plant & Equipment
Total Assets

$7,500
12,100
10,400
5,900
4,300
$40,200
82,300
$122,500

XYZ Company
Balance Sheet
12/31/xxxx
Liabilities & Equity
Current Liabilities
Accounts Payable
Wages Payable
Notes Payable
Taxes Payable
Total Current Liabilities
Long Term Debt
Total Liabilities
Common Stock
Retained Earnings
Total Liabilities & Equity

$7,200
3,600
5,400
4,200
$20,400
35,700
$56,100
28,700
37,700
$122,500

2

Homework Problem, cont’d
|The projected sales for the forecast period is $165,000. Assume that the existing profit
margin and payout ratio will be maintained in the forecast period. The firm estimates that
additional net fixed asset investment of $18,000 will be required during the forecast period.
Assume that all current assets are spontaneous except Other Current Assets which is
assumed not to change. Assume that all current liabilities except Notes Payable are
spontaneous.
A. Prepare the pro forma Balance Sheet and pro forma Income Statement. The EFR will be
a plug number that makes the balance sheet balance like in the class example.
B. Using the existing financial statements as your basis, estimate firm XYZ’s EFR for the
forecast period again, but this time using the cookbook model. Also based on the cookbook
equation, how much funding is expected to come from each of the internal sources of funds
(change in SL and retained earnings). If firm XYZ must maintain a minimum current ratio
of 1.8 and a maximum debt ratio of 0.50, how would you propose the EFR be financed
(how much short term debt, long term debt, and equity)?
C. Based on your results in part B, prepare a Pro Forma Sources and Uses of Funds
Statement to reflect the financing allocations that you decided on in part B. The only format
change required is to break the total EFR down into the amounts of short term debt, long
term debt, and new equity. You will have to use the numbers for CA, SL, addition to
R.E., and EFR that you calculated in part B to make it balance, since they may be slightly
different than those from part A. Explain the basis for your financing allocations.

Homework Problem, cont’d
Hints:
Pro Forma TA = Existing TA + CA + NFA
Max Pro Forma Total Liabilities = (D.R. Constraint)(Pro Forma TA)
Max Additional TL = Max. Pro Forma TL –Existing TL
Max Additional External Debt = Max Additional TL – ?SL
Min Additional External Equity = EFR – Max Additional External Debt
Pro Forma CA = Existing CA + CA
Max Pro Forma CL = Pro Forma CA / CR Constraint
Max Additional CL = Max Pro Forma CL – Existing CL
Max Additional Notes Payable (N/P) = Max Additional CL – SL
Additional LTD = Max Additional External Debt – Max N/P

3

Check Answers
Pro forma EFR = $18,589
Cookbook EFR = $18,941
Financing Plan with constraints at their limits
Additional Notes Payable: $2,820
Additional LTD: $11,861
Additional Equity: $4,260
A more conservative plan would use less debt,
more equity.

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