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Unformatted text preview: ess we take specific actions to change the amount, so we mark this item as “n/a.” Similarly, we use “n/a” for long-term debt because it won’t automatically change with sales. The same is true for common stock and paid-in surplus. The last item on the righthand side, retained earnings, will vary with sales, but it won’t be a simple percentage of sales. Instead, we will explicitly calculate the change in retained earnings based on our projected net income and dividends. We can now construct a partial pro forma balance sheet for Rosengarten. We do this by using the percentages we have just calculated wherever possible to calculate the projected amounts. For example, net fixed assets are 180 percent of sales; so, with a new sales level of $1,250, the net fixed asset amount will be 1.80 $1,250 $2,250, representing an increase of $2,250 1,800 $450 in plant and equipment. It is important to note that for those items that don’t vary directly with sales, we initially assume no change and simply write in the original amounts. The result is shown in Table 3.13. Notice that the change in retained earnings is equal to the $110 addition to retained earnings we calculated earlier. Inspecting our pro forma balance sheet, we notice that assets are projected to increase by $750. However, without additional financing, liabilities and equity will only increase by $185, leaving a shortfall of $750 185 $565. We label this amount external financing needed (EFN). Rather than create pro forma statements, if we were so inclined we could calculate EFN directly as follows:
EFN ssets ( _A_______ Sales Sales Spontaneous liabilities ) ( _________________________ Sales (1 d )) Sales ) [3.22] (PM Projected sales CHAPTER 3 Financial Statements Analysis and Long-Term Planning 69 ros82361_ch03.indd 69 5/27/08 8:23:49 PM Confirming Pages
TABLE 3.13 R O S E N G A R T E N C O R P O R AT I O N Pa r t i a l P r o Fo r m a B a l a n c e S h e e t Assets NEXT YEAR Current assets Cash Accounts receivable Inventory Total Fixed assets Net plant and equipment CHANGE FROM CURRENT YEAR Current liabilities Accounts payable Notes payable Total Long-term debt Owners’ equity Common stock and paid-in surplus Retained earnings Total Total liabilities and owners’ equity External financing needed Liabilities and Owners’ Equity NEXT YEAR CHANGE FROM CURRENT YEAR $ 200 550 750 $1,500 $ 40 110 150 $300 $ 375 100 $ 475 $ 800 $ 75 0 $ 75 $0 $2,250 $450 $ 800 1,110 $1,910 $3,185 $ 565 $0 110 $110 $185 $565 Total assets $3,750 $750 In this expression, “ Sales” is the projected change in sales (in dollars). In our example, projected sales for next year are $1,250, an increase of $250 over the previous year, so Sales $250. By “Spontaneous liabilities,” we mean liabilities that naturally move up and down with sales. For Rosengarten, the spontaneous liabilities are the $300 in accounts payable. Finally, PM and d are the profit margin and dividend payout ratios, which we previously calculated as 13.2 percent and 33 1/3 percent, respectively. Total assets and sales are $...
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This note was uploaded on 10/28/2009 for the course FINA 505 taught by Professor Deborahcernauskas during the Summer '09 term at Northern Illinois University.
- Summer '09