Question

1. Fire Corp financial statements:

    Pro forma income statement                              Pro forma balance sheet                 

       Sales                 $ 32000               Assets       $   25300      Debt          $   5800

       Costs                    24400                                                     Equity          19500

       Net income       $    7600               Total         $ 25,300      Total            $25,300

       It expects 15% sales increase. It also predicts every item on the balance sheet will increase by 15% as well. It currently pays no dividend.

1. Create the pro forma income statement and balance sheet with the new sales level.
2. What’s the retained earnings? and new equity level?
3. With no dividend, debt is the plug variable. what’s the new debt level?
4. If Fire Corp decides to pay half of income as dividend, cost and assets vary with sales, but not debt and equity, what’s the EFN?

Answer 1

Pro-forma income statement
Sales	$36,800	32000*1.15
Costs	$28,060	24400*1.15
Net income	$8,740
Pro-forma balance sheet
Assets (25300*1.15)	$29,095	Debt	$5,800
		Equity	$28,240	(19500+8740)
Total	$29,095	Total	$34,040
Retained earnings would increase by $8,740 and thus new equity level would be $28,240
New debt level	29095-28240
New debt level	$855
Addition to retained earnings	8740*50%
Addition to retained earnings	$4,370
Addition to assets (25300*15%)	$3,795
Addition to retained earnings	$4,370
External financing needed	$575
Thus, external financing needed would be $575