Question

Garlington Technologies Inc. s 2010 financial statements are shown below. Suppose that in 2011 sales increase by 10% over 2010 sales and that 2011 dividends will increase to $ 112,000. Construct the pro forma financial statements using the percent of sales method. Assume the firm operated at full capacity in 2010. Use an interest rate of 13% on the debt balance at the beginning of the year. Assume that the AFN will be in the form of notes payable.

	2010	2011 (1st Pass)	2011 (2nd Pass)
Sales	$        3,600,000
Operating Costs	$        3,279,720
EBIT	$           320,280
Interest	$             18,280
EBT	$           302,000
Taxes	$           120,800
Net Income	$           181,200
Dividends	$           108,000
Cash	$           180,000
Receivables	$           360,000
Inventories	$           720,000
Tot Current Assets	$        1,260,000
Fixed Assets	$        1,440,000
Total Assets	$        2,700,000
Accounts Payable	$           360,000
Notes Payable	$           156,000
Accruals	$           180,000
Total Current Liabilities	$           696,000
Common Stock	$        1,800,000
Retianed Earnings	$           204,000
Total Liabilities and Equities	$        2,700,000

Answer 1

The AFN calculation is as shown below:

	2010	2011
Sales	3600000	3960000
Operating Costs	3279720	3607692
EBIT	320280	352308
Interest	18280	20280
EBIT	302000	332028
Taxes	120800	132811.20
Net Income	181200	199216.80
Dividends	108000	112000
Additon to RE	73200	87216.80
Cash	180000	198000
Receivables	360000	396000
Inventories	720000	792000
Tot Current assets	1260000	1386000
Fixed assets	1440000	1584000
Total Assets	2700000	2970000
Accounts payable	360000	396000
Nots Payable	156000	156000
Accruals	180000	198000
Total Current Liability	696000	750000
Common Stock	1800000	1800000
Retained earnings	204000	291216.8
Total liabilties and equity	2700000	2841217
AFN		128783.20