In 2006 Cisco Systems has sales of $10 million. It wishes to analyze expected performance and
financing needs for 2008, two years ahead. Prepare a pro forma balance sheet dated December 31, 2008 given the following information:
- The percentages of sales for items that vary over the two years directly with sales are as follows: Accounts receivable, Inventory and Accounts payable all change 20% between 2006 and 2008.
- Net profit margin is expected to remain 3%.
- Marketable securities and other current liabilities are expected to remain unchanged.
- A minimum cash balance of $480,000 is desired.
- A new machine costing $650,000 will be acquired in 2007, and equipment costing $850,000 will be purchased in 2008. Total depreciation in 2007 is forecast as $290,000, and in 2008 $390,000 of depreciation will be taken.
- Accruals are expected to rise to $500,000 by the end of 2008.
- No sale of retirement of long-term debt is expected.
- No sale or repurchase of common stock is expected.
- The dividend payout of 50% of net profits is expected to continue.
- Sales are expected to be $11 million in 2007 and $12 million in 2008.
- Common equity is the sum of common stock and retained earnings.
- The current ratio of the industry average is above 2.0 for both 2006 and 2008.
- The debt ratio of the industry average is around 50% for both 2006 and 2008.
- The return on equity of the industry average is around 8% for both 2006 and 2008.
- The December 31, 2006, balance sheet is shown on the next page.
- A similar format of the balance sheet can be used for December 31, 2008. This judgemental approach includes for December 31, 2008:
a. a new calculation of the net fixed assets.
b. a reconciliation of the retained earnings account.
c. a resulting external financing required!
Pro Forma Balance Sheet
December 31, 2006
Marketable securities 200,000
Accounts receivable 1,200,000
Total current assets $3,600,000
Net fixed assets 4,000,000
Total assets $7,600,000
Liabilities and stockholders’ equity
Accounts payable $1,400,000
Other current liabilities 80,000
Total current liabilities $1,880,000
Long-term debts 2,000,000
Total liabilities $3,880,000
Common equity 3,720,000
Total liabilities and stockholders’ equity $7,600,000
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