AFN – Garlington Technologies Inc’s 2009 financial statements shown below: Balan
ID: 2673179 • Letter: A
Question
AFN – Garlington Technologies Inc’s 2009 financial statements shown below:Balance Sheet of 21 Dec 2009
Cash $180,000 Accounts payable $360,000
Receivables 360,000 156,000
Inventories 720,000 ¬180,000
Total current assets $1,260,000 Total current liabilities $696,000
Fixed assets 1,440,000 Common stock 1,800,000
________ ________
Total assets $2,700,000 Total liabilities and equity $2,700,000
Income Statement for 31 December 2009
Sales- $3,600,000
Operating costs- 3,279.720
EBIT $ 320,280
Interest 18,280
EBT $ 302,000
Taxes (40%) 120,800
Net income $ 181,200
Dividends $ 108,000
Suppose 2010 sales increase by 10% over 2009 sales and that 2010 dividends will increase to $112,000. Construct the pro forma financial statements using the forecasted financial statement method. Assume the firm operated at full capacity in 2009. Use an interest rate of 13% on the debt balance at the beginning of the year. Assume that the AFN will be in the form of notes payable.
Explanation / Answer
Forecast 1st Pass AFN 2nd Pass
2009 Basis Additions 2010 Effects 2010
Sales $3,600,000 1.10 x Sales01 $3,960,000 $3,960,000
Operating costs 3,279,720 0.911 x Sales02 3,607,692 3,607,692
EBIT $ 320,280 $ 352,308 $ 352,308
Interest 20,280 20,280 +8,371** 28,651
EBT $ 300,000 $ 332,028 $ 323,657
Taxes (40%) 120,000 132,811 129,463
Net income $ 180,000 $ 199,217 $ 194,194
Dividends: $1.08
x 100,000 = $ 108,000 $ 112,000* +3,005*** $ 115,005
Addition to RE: $ 72,000 $ 87,217 $ 79,189
Preliminary 2002 Dividends = $1.12 x 100,000 = $112,000.
Interest = $64,392 / 0.13 = $8,371.
2002 Dividends = $64,391/$24 x 1.12 = $3,005.
Addition to RE = $79,189 - $87,217 = -$8,028.
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Pro Forma Balance Statement
December 31, 2010
Forecast
Basis % 1st Pass AFN 2nd Pass
Cash $ 180,000 0.05 $ 198,000 $ 198,000
Receivables 360,000 0.1 396,000 396,000
Inventories 720,000 0.2 792,000 792,000
Total current
assets $1,260,000 $1,386,000 $1,386,000
Fixed assets 1,440,000 0.4 1,584,000 1,584,000
Total assets $2,700,000 $2,970,000 $2,970,000
Accounts payable $ 360,000 0.1 $ 396,000 $ 396,000
Notes payable 156,000 156,000 +64,392 220,392
Accruals 180,000 0.05 198,000 198,000
Total current
liabilities $ 696,000 $ 750,000 $ 814,392
Common stock 1,800,000 1,800,000 +64,391 1,864,391
Retained earnings 204,000 87,217* 291,217 -8,028** 283,189
Total liab.
and equity $2,700,000 $2,841,217 $2,961,972
AFN = $ 128,783 $ 8,028
Cumulative AFN = $ 128,783 $ 136,811
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AFN = $2,700,000/$3,600,000(deltaSales)
- ($360,000 + $180,000)/$3,600,000(deltaSales)
- (0.05)($3,600,000 + delta Sales)0.4
= 0.75(DSales) - 0.15(deltaSales) - 0.02(DSales) - $72,000
= 0.6(DSales) - 0.02(deltaSales) - $72,000
$72,000 = 0.58(deltaSales);
delta Sales = $124,138.
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