Introduction to Accounting and Finance 183 COMPREHENSIVE PROBLEM The accounting

Question

Introduction to Accounting and Finance 183 COMPREHENSIVE PROBLEM The accounting department of Whitelands, Inc. is forecasting its 2019 income statement and balance sheet at the end of 2018. The department compiled the following assump- tions about 2019 I. 2 Income from operations will equal 15% of total assets. Inventory, accounts payable, an d cost of goods sold will increase by 10% from their 2018 amounts. Sales revenue and accounts receivable will also increase by 10% from their 2018 amounts. The firm will purchase land for $150,000 with funds borrowed from a bank at 10% interest. (The land will be used for a future, building site.) Other operating expenses will increase to $650,000, due to a planned employee wage increase The income tax rate will remain at 40%. 4 5. 7. Whitelands will pay a dividend of $50,000 8. The accrued liabilities account will be used to balance the balance sheet. Required: (1) Use the above information along with the 2018 financial statements (below) to fore- the 2019 income statement and balance sheet. (The dollar amounts are in thousands and rounded to the nearest thousand dollar amount. Do not forecast the 2019 statement of cash flows Income Statements (S in thousands) For the Years Ended December 31 2019 2018 Sales revenue Less: Cost of goods sold Gross profit Operating expenses: $2,000 1200 800 Depreciation expense Other operating expenses Interest (financing) expense Income tax expense (40%) 100 Income from operations 80 Pretax income 80 32 $ 48 Net income

Explanation / Answer

Income statement ($ '000s) For the Years ended Dec. 31 2019 2018 Sales Revenue (2000*1.1) 2200 2000 Less: COGS (1200*1.1) 1320 1200 Gross Profit 880 800 Less: Operating Expenses: Depreciation expense 100 100 Other opg.expenses 650 620 Income from operations 130 80 Interest(financing)expense(150000*10%/1000) 15 0 Pretax Income 115 80 Income tax expense at 40% 46 32 Net Income 69 48 Balance Sheet($ 000's) 12/31/2019 12/31/2018 Assets Cash(317-66-132) 119 70 Accounts receivable,net(60*1.1) 66 60 Inventory(120*1.1) 132 120 Total current assets(867-150-400) 317 250 Property,Plant& Equipment Land 150 0 Equipment(at cost) 1000 1000 Less: Accumulated Depn. -600 -500 Equipment,net of Acc.depn. 400 500 Total assets(130/15*100) 867 750 Liabilities Accounts payable(70*1.1) 77 70 Accrued liabilities(bal.fig.) 111 170 Total Liabilities 188 240 Long-Term liabilities Notes payable 150 0 Total Liabilities 338 240 Shareholders' Equity Common stock 400 400 Retained Earnings(110+69-50) 129 110 Total Shareholders' Equity 529 510 Total Liabilities& Shareholders' Equity 867 750 2.. Free cah flows for 2019 EBIT*(1-Tax Rate)+Depn.-CAPEX-Changes to Working capital (115*(1-40%))+100-150-(66+132-60-120)= 1 ie. $ 1000 3.. Present value of FCFs 2019-2021 at 8% WACC FCF(2019)     28000*0.92953= 26026.84 FCF(2020)     35000*0.85734= 30006.9 FCF(2021)      45000*0.79383= 35722.35 Total 91756.09 4.. Free Cash flow in 2022= FCF(2021)*(1.02), ie. 35722.35*1.02= 36436.80 5..Terminal Value of FCF 36436.80/(8%-2%)= 607280

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