Dahlia Colby, CFO of Charming Florist Ltd., has created the firm’s pro forma bal
ID: 2813744 • Letter: D
Question
Dahlia Colby, CFO of Charming Florist Ltd., has created the firm’s pro forma balance sheet for the next fiscal year. Sales are projected to grow by 20 percent to $420 million. Current assets, fixed assets, and short-term debt are 25 percent, 70 percent, and 15 percent of sales, respectively. Charming Florist pays out 25 percent of its net income in dividends. The company currently has $128 million of long-term debt and $56 million in common stock par value. The profit margin is 16 percent.
a. Prepare the current balance sheet for the firm using the projected sales figure. (Be sure to list the assets and liabilities in order of their liquidity. Enter your answers in dollars, not millions of dollars, e.g.,1,234,567. Do not round intermediate calculations and round your answers to the nearest whole
number, e.g., 32.)
b.
Based on Ms. Colby’s sales growth forecast, how much does Charming Florist need in external funds for the upcoming fiscal year? (Enter your answer in dollars, not millions of dollars, e.g., 1,234,567. Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)
c-1.
Prepare the firm’s pro forma balance sheet for the next fiscal year. (Be sure to list the assets and liabilities in order of their liquidity. Enter your answers in dollars, not millions of dollars, e.g., 1,234,567. Do not round intermediate calculations and round your answers to the nearest whole number, e.g., 32.)
c-2.
Calculate the external funds needed. (Enter your answer in dollars, not millions of dollars, e.g., 1,234,567. Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)
Dahlia Colby, CFO of Charming Florist Ltd., has created the firm’s pro forma balance sheet for the next fiscal year. Sales are projected to grow by 20 percent to $420 million. Current assets, fixed assets, and short-term debt are 25 percent, 70 percent, and 15 percent of sales, respectively. Charming Florist pays out 25 percent of its net income in dividends. The company currently has $128 million of long-term debt and $56 million in common stock par value. The profit margin is 16 percent.
Explanation / Answer
a) Current sales = Expected sales / (1 + growth) = $420 million / (1 + 20%) = $350 million
b) External financing needed (EFN) can be computed using the following equation -
EFN = [ (Assets / Sales) x Change in sales ] - [ (Debt / Sales) x Change in sales ] - [ (Profit margin x expected sales) x (1 - dividend payout ratio) ]
Debt here means short - term debt as that will vary with sales and long - term debt will not.
Expected sales = 420,000,000
Change in sales = 420,000,000 - 350,000,000 = 70,000,000
EFN = [ (332,500,000 / 350,000,000) x 70,000,000 ] - [ (63,000,000 / 350,000,000) x 70,000,000 ] - [ (16% x 420,000,000) x (1 - 0.25) ]
or, EFN = 66,500,000 - 12,600,000 - 50,400,000 = 3,500,000
c-1) Addition to retained earnings = Expected sales x profit margin x (1 - dividend payout ratio) = $420,000,000 x 16% x (1 - 0.25) = $50,400,000
c-2) EFN = Total assets - Total liabilities and equity = 399,000,000 - 395,500,000 = 3,500,000
Balance Sheet Assets Amount Liabilities and Equity Amount Current assets (350 x 25%) 87,500,000 Short - term debt (420 x 15%) 63,000,000 Fixed assets (350 x 70%) 245,000,000 Long - term debt 128,000,000 Common stock 56,000,000 Accumulated retained earnings (balancing figure) 85,500,000 Total Equity 141,500,000 Total Assets 332,500,000 Total Liabilities and equity (=Total assets) 332,500,000Related Questions
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