Pro forma balance sheet Peabody & Peabody has 2015 sales of $10 million. It wish
ID: 2654534 • Letter: P
Question
Pro forma balance sheet Peabody & Peabody has 2015 sales of $10 million. It
wishes to analyze expected performance and financing needs for 2017, which is
2 years ahead. Given the following information, respond to parts a and b.
(1) The percents 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 2016, and equipment
costing $850,000 will be purchased in 2017. Total depreciation in 2016 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 2016 and $12 million in 2017.
(10) The December 31, 2015, balance sheet follows.
Peabody & Peabody Balance Sheet December 31, 2015
Assets Liabilities and stockholders’ equity
Cash $ 400 Accounts payable $1,400
Marketable securities 200 Accruals 400
Accounts receivable 1,200 Other current liabilities 80
Inventories 1,800 Total current liabilities $1,880
Total current assets $3,600 Long-term debt 2,000
Net fixed assets 4,000 Total liabilities 3,880
Total assets $7,600 Common equity 3,720
Total liabilities and
stockholders’ equity $7,600
a. Prepare a pro forma balance sheet dated December 31, 2017.
b. Discuss the financing changes suggested by the statement prepared in part a.
Explanation / Answer
Pro forma balance sheet Peabody & Peabody has 2015 sales of $10 million. It wishes to analyze expected performance and financing needs for 2017, which is 2 years ahead. Given the following information, respond to parts a and b. (1) The percents 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 2016, and equipment costing $850,000 will be purchased in 2017. Total depreciation in 2016 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 2016 and $12 million in 2017. (10) The December 31, 2015, balance sheet follows. Peabody & Peabody Balance Sheet December 31, 2015 Assets Liabilities and stockholders’ equity Cash $ 400 Accounts payable $1,400 Marketable securities 200 Accruals 400 Accounts receivable 1,200 Other current liabilities 80 Inventories 1,800 Total current liabilities $1,880 Total current assets $3,600 Long-term debt 2,000 Net fixed assets 4,000 Total liabilities 3,880 Total assets $7,600 Common equity 3,720 Total liabilities and stockholders’ equity $7,600 a. Prepare a pro forma balance sheet dated December 31, 2017. b. Discuss the financing changes suggested by the statement prepared in part a. a. Proforma Balance Sheet as on December 31, 2016 (Sales = 11 million) 11000000 Assets, Liabilities and Stockholders' Equity (All values in $'000s) Accounts Payable 1,540 Cash 480 Accruals 450 Marketable Securities 200 Other Current Liabilities 245 Accounts Receivable 1,320 Inventories 1,980 Total Current Liabilities 2,235 Total Current Assets 3,980 Long Term Debt 2,220 Total Liabilities 4,455 Common Equity 3,885 Net Fixed Assets 4,360 Total Liability and Stockholders' Equity 8,340 Total Assets 8,340 In common equity, the dividend payout of 50% is deducted, and the value thereof correspondingly added in Other Current Liabilities. Refer Cell J38 = 11,000,000 (sales in 2016) based on which values for Accounts Receivable, Inventories, Accounts Payable and Net Profit Margin are calculated. Accruals are increasing to $ 500,000 by 2017. Hence, in 2016, the value is assumed to rise by $ 50,000, and the balance $ 50,000 is expected to rise in 2017. To match the balance sheet, the differential of $ 220,000 is added in Long Term Debts, thereby suggesting increase in debt financing. Proforma Balance Sheet as on December 31, 2017 (Sales = 12 million) 12000000 Assets, Liabilities and Stockholders' Equity (All values in $'000s) Accounts Payable 1,680 Cash 480 Accruals 500 Marketable Securities 200 Other Current Liabilities 260 Accounts Receivable 1,440 Inventories 2,160 Total Current Liabilities 2,440 Total Current Assets 4,280 Long Term Debt 2,595 Total Liabilities 5,035 Common Equity 4,065 Net Fixed Assets 4,820 Total Liability and Stockholders' Equity 9,100 Total Assets 9,100 In common equity, the dividend payout of 50% is deducted, and the value thereof correspondingly added in Other Current Liabilities. Refer Cell J64 = 12,000,000 (sales in 2016) based on which values for Accounts Receivable, Inventories, Accounts Payable and Net Profit Margin are calculated. Accruals are increasing to $ 500,000 by 2017. Hence, in 2016, the value is assumed to rise by $ 50,000, and the balance $ 50,000 is expected to rise in 2017. To match the balance sheet, the differential of $ 375,000 is added in Long Term Debts, thereby suggesting increase in debt financing. b. In order to obtain equilibrium in the Proforma Balance Sheet, it is suggested to go for debt financing of $ 220,000 in 2016, and $375,000 in 2017. Since no additional equity is to be raised, but additions to fixed assets are to be done, and dividend payouts/other net current assets' balances are to be maintained, this is required to be done.
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