Major Manuscripts, Inc. 2012 Income Statement

Net sales

$

7,800

Cost of goods sold

6,865

Depreciation

210

Earnings before interest and taxes

$

725

Interest paid

31

Taxable Income

$

694

Taxes

284

Net income

$

410

Dividends

$

187

Major Manuscripts, Inc.
2012 Balance Sheet

2012

2012

Cash

$

2,400

Accounts payable

$

1,550

Accounts rec.

880

Long-term debt

300

Inventory

2,700

Common stock

$

3,100

Total

$

5,980

Retained earnings

4,430

Net fixed assets

3,400

Total assets

$

9,380

Total liabilities & equity

$

9,380

Major Manuscripts, Inc., is currently operating at maximum capacity. All costs, assets, and current liabilities vary directly with sales. The tax rate and the dividend payout ratio will remain constant. In 2013, no new equity will be raised and sales are projected to increase by 10 percent. Construct the pro formas for 2013 and answer the following questions (show your work!).

Projected total assets= $
Projected retained earnings= $
Additional new debt required= $

Projected total assets = $10,318

Projected retained earnings = $4,675.30

Additional new debt required = $537.70

Explanation:

external financing needed ( EFN )= [(total assets/total sales) x ( sales )] - [(total current liabilities/total sales) x ( sales )] - [profit margin x forecasted sales in $ x (1 - dividend payout ratio)]

total assets = $9,380,

projected total assets = $9,380 x 1.1 = $10,318

total sales = $7,800

sales = $780

current liabilities = $1,550

profit margin = net income / sales

= $410 / $7,800

= 0.052564

forecasted sales = $7,800 x 1.1 = $8,580

dividends payout ratio = dividends / net income

= $187 / $410

= 0.4561

Therefore:

EFN = [($9,380/$7,800) x ($780)] - [($1,550/$7,800) x ($780)] - [0.052564 x $8,580 x (1 - 0.4561)]

EFN = $938 - $155 - $245.30

EFN = $537.70

projected retained earnings = current retained earnings - projected net income - projected dividends

= $4,430 + $451 - $205.70

= $4,675.30

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