The following are the first stage and second stage pro forma financial statement
ID: 2772869 • Letter: T
Question
The following are the first stage and second stage pro forma financial statements of Executive Fruit Company for the year ended December 2015.
How would Executive Fruit’s financial model change if the dividend payout ratio were cut to 1/3? Use the revised model to generate a new financial plan for 2015 assuming that debt is the balancing item. What would be the required external financing? (Do not round intermediate calculations.)
Dividends fall by $ . Therefore, the requirement for external financing falls from $ to $ . On the other hand, shareholders' equity will be increased by $ .
The right-hand side of the balance sheet becomes (Do not round intermediate calculations. Enter your answers in thousands.):
The following is the financial statement of Executive Fruit Company for the year ended December 2014.Explanation / Answer
As per proforma financial statements net income before dividends=$162,000. If one third of this is paid out as dividend, then addition to retained earnings would be=$162,000 -$54,000 =$108,000.
Therefore, revised proforma financial statements are as follows:
External financing required is $42,000.
Dividends fall by$54,000, therefore, the requirement for external financing falls from $96,000 to $42,000. On the other hand share holders equity increases by $108,000.
The right hand side of the balance sheet becomes as below:
PRO FORMA BALANCE SHEET (Year-End, 2015) (Figures in $ Thousands) Assets Net working capital $330.00 Fixed assets $1,320.00 Total assets(A) $1,650.00 Liabilities and shareholders' equity Long-term debt $600.00 Shareholders' equity $1,008.00 $900+retained earnings of $108 Total liabilities and shareholders' equity (B) $1,608.00 Required external financing (A-B) $42.00 Required external financingRelated Questions
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