AC517

PROBLEMS
4-7 4-10
PRO FORMA INCOME

STATEMENT
At the end of last year, Roberts Inc. reported the following
income statement (in millions of dollars):
Sales
$3,000
Operating costs excluding depreciation

EBITDA
Depreciation
EBIT
Interest
EBT
Taxes (40%)
Net Income
$550
250
$300
125
$175
70
$105
2,450
Looking ahead to the following year, the companys CFO has

assembled this information:
Year-end sales are expected to be 10% higher than the $3
billion in sales generated last year.
Year-end operating costs, excluding depreciation, are
expected to equal 80% of year-end sales.
Depreciation is expected to increase at the same rate as
sales.
Interest costs are expected to remain unchanged.
The tax rate is expected to remain 40%.
On the basis of that information, what will be the forecast for
Roberts year-end net income?
ANSWER
Sales ($3,000 x 110%)
$3,300
Operating costs excluding depreciation
($3,300 x 80%)
2,640
EBITDA
Depreciation
EBIT
Interest
EBT
Taxes (40%)
Net Income
$660
($250 x 110%)
$385
125
$260
104
$156
275
LONG-TERM
FINANCING NEEDED
At year-end 2008, total assets for Ambrose Inc. were $1.2 million
and accounts payable were $375,000. Sales, which in 2008 were
$2.5 million, are expected to increase by 25% in 2009. Total
assets and accounts payable are proportional to sales, and that
relationship will be maintained. Ambrose typically uses no
current liabilities other than accounts payable. Common stock
amounted to $425,000 in 2008, and retained earnings were
$295,000. Ambrose plans to sell new common stock in the
amount of $75,000. The firms profit margin on sales is 6%; 60%
of earnings will be paid out as dividends.
a. What was Ambroses total debt in 2008?
b. How much new, long-term debt financing will be needed in
2008? (Hint: AFN New stock New long-term debt
ANSWER
A.
$1,200,000 = $375,000 + Long-term debt + $425,000 + $295,000

Long-term debt = $105,000.
Total debt = Accounts payable + Long-term debt
= $375,000 + $105,000 = $480,000.
B.
Assets/Sales (A*/S) = $1,200,000/$2,500,000 = 48%.
L*/Sales = $375,000/$2,500,000 = 15%.
2006 Sales = (1.25)($2,500,000) = $3,125,000.
AFN = (A*/S)(S) - (L*/S)(S) - MS1(1 - d) - New common
stock
= (0.48)($625,000) - (0.15)($625,000) - (0.06)($3,125,000)(0.6)
- $75,000
= $300,000 - $93,750 - $112,500 - $75,000 = $28,750.
SALES INCREASE
Pierce Furnishings generated $2 million in sales during 2008,
and its year-end total assets were $1.5 million. Also, at yearend, current liabilities were $500,000, consisting of $200,000
of notes payable, $200,000 of accounts payable, and
$100,000 of accrued liabilities. Looking ahead to 2009, the
company estimates that its assets must increase by $0.75 for
every $1.00 increase in sales. Pierces profit margin is 5%,
and its retention is 40%. How large of a sales increase can
the company achieve without having to raise funds
externally.
ANSWER
AFN = (A*/S0)S - (L*/S0)S - MS1(1 - d)
= (0.75)S - S -(0.05)(S1)(1 - 0.6)
= (0.75)S - (0.15)S - (0.02)S1
= (0.6)S - (0.02)S1
= 0.6(S1 - S0) - (0.02)S1
= 0.6(S1 - $2,000,000) - (0.02)S1
= 0.6S1 - $1,200,000 - 0.02S1
$1,200,000 = 0.58S1
$2,068,965.52 = S1.
Sales can increase by $2,068,965.52 - $2,000,000 = $68,965.52
without additional funds being needed.
REGRESSION
RECEIVABLES
Edward Industries has $320 million in sales. The company
expects that its sales will increase 12% this year. Edwards CFO
uses a simple linear regression to forecast the companys
receivables level for a given level of projected sales. On the basis
of recent history, the estimated relationship between receivables
and sales (in millions of dollars) is as follows:
Receivables= $9.25 + 0.07(Sales)
Given the estimated sales forecast and the estimated relationship
between receivables and sales, what are your forecasts of the
companys year-end balance for receivables and its year-end days
sales outstanding (DSO) ratio? Assume that DSO is calculated on
the basis of a 365-day a year.
ANSWER
YEAR END BALANCE OF RECEIVABLE
Sales= $320 x 1.12 = $358.4
Receivables= $9.25 + 0.07(Sales)
= $ 34.338
YEAR END DAYS SALES OUTSTANDING
DSO= 365/Sales/ Receivable
$358.4 = 365
$34.338
X= 34.97 or 35

AC517

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What is the forecast for Robert's year-end net income based on the information provided?

What was Ambrose's total debt in 2008?

PROBLEMS

PRO FORMA INCOME

Operating costs excluding depreciation

Looking ahead to the following year, the companys CFO has

$1,200,000 = $375,000 + Long-term debt + $425,000 + $295,000

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