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Best case forecast

I need some help figuring out how to do these calculations. I attached the balance sheet and growth assumptions as well as a spreadsheet.
Laredo Railroad Financial Data

Laredo Balance Sheet
(amounts in thousands, except per share amounts)
as of December 31

1998 1999
ASSETS
Current assets
Cash and cash equivalents $211 $81
Accounts receivable 5,776 6,564
Prepaid expenses and other current assets 334 674
Deferred income taxes 367 386
Total current assets $6,688 $7,705
Noncurrent assets
Plant, property, and equipment 61,830 67,189
Other noncurrent assets 1,246 1,312
Total noncurrent assets $63,076 $68,501

Total assets $69,764 $76,206

LIABILITIES
Current liabilities
Current portion of long-term debt $4,589 $6,024
Accounts payable 5,489 6,334
Accrued liabilities 4,800 5,650
Total current liabilities $14,878 $18,008
Noncurrent liabilities
Long-term debt, less current portion 50,283 56,433
Total noncurrent liabilities $50,283 $56,433

Total liabilities $65,161 $74,441

SHAREHOLDERS' EQUITY
Total shareholders' equity $4,603 $1,765

Total liabilities and shareholders' equity $69,764 $76,206
Income Statement
(amounts in thousands)

as of December 31

1998 1999
Revenues $46,497 $49,997
Cost of goods sold 0 0
Gross Profits $46,497 $49,997

Operating Expenses
Transportation $16,461 $18,775
Selling, general, and administrative 8,122 9,054
Maintenance of equipment 6,108 6,675
Maintenance of ways and structures 5,584 6,112
Depreciation 3,813 4,100
Total Operating Expenses $40,088 $44,716

Income from Operations $6,409 $5,281
Interest expense 4,545 4,887
Income before income taxes 1,864 394
Income taxes 718 152
Net Income $1,146 $242
Cost of Capital
Laredo Railroad's cost of capital is 11.2 percent.

Sales
Blue Mesa Rail will be able to recapture many of Laredo's lost customers by reducing service delays through increased capacity, more efficient speed selections, and decentralized dispatching functions. Sales growth projections for the best-case scenario?in which operations will run at full capacity?are shown below.
Year 1
(2000) Year 2
(2001) Year 3
(2002) Year 4
(2003) Year 5
(2004) Year 6
(2005) Year 7
(2006) Year 8
(2007) Year 9
(2008) Year 10
(2009)
Sales Growth
(Projected) 21% 22% 23% 24% 25% 8% 8% 8% 8% 8%
Sales growth projections for the worst-case scenario are shown below.
Year 1
(2000) Year 2
(2001) Year 3
(2002) Year 4
(2003) Year 5
(2004) Year 6
(2005) Year 7
(2006) Year 8
(2007) Year 9
(2008) Year 10
(2009)
Sales Growth
(Projected) 18% 19% 20% 21% 22% 8% 8% 8% 8% 8%
Operating Expenses
Transportation and maintenance costs
Anticipated declines in diesel fuel prices will cause variable transportation costs to decline as a proportion of sales. Operations will become more efficient as the company leverages operating systems, purchases economies of scale, improves asset utilization, reduces performance penalties by improving service scheduling, and discontinues service on unprofitable lines. Transportation and maintenance costs should decline to 55 percent of sales and will follow the breakdown shown in the table below.
Category Percent of Sales
Transportation 34%
Maintenance of equipment 11%
Maintenance of ways and structures 10%
General and Administrative Expenses
Higher compensation and benefits costs will be offset by lower labor costs as administrative functions are combined and select employees are laid off. Laredo's general and administrative expenses should decline to a proportion of sales similar to that of Blue Mesa Rail (16.5 percent).
Depreciation
Depreciation rates are usually represented as a percentage of the projected value of property and equipment or gross fixed assets. However, because assets will increase proportionately with sales, property and equipment will be depreciated on a straight-line basis at a rate of 8 percent of sales.
Investments and Capital Expenditures
In 1998, Laredo devoted most of its capital expenditures to overhauling locomotives and freight cars and maintaining tracks, signals, bridges, and tunnels. The remaining expenditures were allocated to terminal and line expansions and other projects. Blue Mesa Rail will replace Laredo's direct-current locomotives with higher-powered, alternating-current models and will lay additional tracks along existing high-use lines to increase capacity and reduce shipping delays. It will also install a movable conveyor system to reduce labor costs and increase loading-car efficiency. Given these plans, investments and capital expenditure requirements should represent roughly 13.5 percent of future sales.
Working Capital Accounts
Laredo's principal sources of liquidity are cash from operations and external borrowings, such as commercial paper, credit facilities, and long-term debt. After the acquisition, Laredo will rely primarily on cash from operations to fund working capital and capital expenditures; the company will continue to have short-term cash needs, which can be satisfied with short-term borrowings. Laredo's collection record can be improved with tightened credit terms and improved receivables management. Receivables, prepaid expenses, and other current assets should increase proportionately to sales, representing a combined 25 percent of future sales.
Laredo's liabilities consist of casualty, environmental, tax, and other accrued liabilities, as well as accounts payable, compensation and benefits, and rents. Higher employee merger and separation costs will be substantially offset with improved cash-management techniques and reduced borrowing costs. As a result, accounts payable, accrued liabilities, and short-term notes payable should decline to 20 percent of future sales.
Debt
On December 31, 1999, Laredo owed $62.46 million in long-term senior and subordinated debt, including short-term notes due. At that time, Laredo had $22 million in bank credit facilities available, but it had not yet borrowed against these available facilities. Laredo also has $81,000 in cash on its balance sheet.
Taxes
A 38.5 percent tax rate is expected.
Inflation
Inflation will not significantly affect Laredo's operations, because the company has increased rates for its customers. Assume that inflation's effects on revenues and costs are proportional, so that revenues and costs will increase by the same percentage. Seasonal changes also should not affect operating revenues.
Salvage Value
Upon the sale of depreciable railroad property, cost less net salvage value is charged to accumulated depreciation, and no gain or loss is recognized. Significant premature retirements are recorded as gains or losses when they occur, but no significant premature retirements are foreseen.
Terminal Value
Laredo is valued as a perpetuity at the end of 10 years. From the end of that 10-year period into perpetuity, Laredo Railroad's cash flow growth is expected to be equal to 3 percent per year. Blue Mesa Rail's average cost of capital is expected to remain constant.

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Solution Summary

The solution explains how to prepare a best case forecasted income statement.

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