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Balance Sheet and Forecasting Calculations

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Problems: 1, 4, 8 and 10
Baldwin Products Company anticipates reaching a sales level of $6 million in one year. The company expects net income during the next year to equal $400,000. Over the past several years, the company has been paying $50,000 in dividends to its stockholders. The company expects to continue this policy for at least the next year. The actual balance sheet and income statement for Baldwin during 2005 follow.
Baldwin Products Company:
Balance Sheet as of December 31, 2005:

Cash - $200,000
Accounts receivable - $400,000
Inventories - $1, 200, 000
Current assets - $1,800, 000
Fixed assets, net - $500,000
Total assets = $2,300,000

Accounts Payable - $600,000
Notes payable - $500,000
Current liabilities - $1,100,000
Long-term debt - $200,000
Stockholder's equity - $1,000,000
Total liabilities and equity = $2,300,000

Income Statement for the Year Ending December 31, 2005
Sales - $4,000
Expenses, including interest and taxes - $3,700,000
Net income - $300,000

a. Using the percentage of sales method, calculate the additional financing Baldwin Products will need over the next year at the $6 million sales level. Show the pro forma balance sheet for the company as of December 31, 2006, assuming a sales level of $6 million is reached. Assume that all assets vary proportionally with sales. Assume that the additional financing needed is obtained in the form of additional notes payable (in other words, assume that notes payable is the "plug" figure.

b. Suppose that Baldwin products management feels that the average collection period on its additional sales - sales over 4million, will be 60 days instead of the current level. By what amount will this increase in the average collection period increase the financing needed by the company over the next year?

c. If Baldwin products banker requires the company to maintain a current ratio equal to 1.6 or greater, what is the maximum amount of additional financing that cal be in the form of notes payable? What other source financing are available to the company?

2. Prepare a cash budget for Rotor products. for the second qtr of 2006, based on the following information. The marketing department has provided you with the following sales estimates, all of which are for cash:

Total Sales

March 2006 (actual ) 425,000

April 2006 330,000

May 2006 420,000

June 2006 450,000

The company estimates its purchase at 60 percent of next month's sales, and payments for those purchases are budgeted to lag the purchases by 1 month. Various disbursements have been estimated as follows:

April may June

wages and sales 220,000 190,000 190,000

rent 14,000 14,000 14,000

other expenses 5,000 6,000 7,000

In addition, a tax payment of 55,000 is due on April 15th. the company's projected cash balance at the beginning of April is 60,000, and the company desires to maintain a balance of 50,000 at the end of the month

3. Appalachian registers inc (ARI) has current sales of 50 million. Sales are expected to grow 75 million next year. ARI currently has accounts receivable of 10 million, inventories of 15 million and net fixed assets of 20 millions. These assets are expected to grow at the same rate as sales over the next year. Accounts payable are expected to increase from their current level of 10 million to a new level of 13 million next year. ARI wants to increase its cash balance at the end of next year by 2 millions over its current cash balances, which average 4 millions. Net income next year is forecasted to be 10 million. Next year ARI plans to pay dividends of 1 millions, up from 500,000 this year. ARI's marginal tax rate is 34%. How much external financing does ARI require?

4. The CFO of IPOD accessories inc has asked for your help in estimating the firm's additional financing needs for next year. The CFO has provided the following information:
sales are forecasted to increase by 450,000
total assets will increase by 80 percent of increase in sales
current liabilities will increase by 30% of increase in sales
net income is projected to equal 125,000
projected dividend payments will equal 35,000

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Problems: 1, 4, 8 and 10

a. In percentage of sales method we first calculate the percentage increase in sales. Using this increase we forecast the increase in assets, spontaneous liabilities and retained earnings.
Additional financing = Increase in assets - increase in spontaneous liabilities - retained earnings
The sales increase from 4million to 6 million = $2 million
The percentage increase in sales is 2/4=50%
The increase in total assets is 2,300,000X50%=1,150,000
Increase in spontaneous liabilities = 600,000X50%=300,000
Increase in retained earnings = 400,000-50,000=350,000
Additional financing needed = 1,150,000-300,000-350,000=$500,000
To make the pro-forma balance sheet we calculate the percentage of sales of all assets and spontaneous liability. We apply this percentage to the new level of sales.
For example cash = 200,000/4,000,000=5% of sales
New level of cash =6,000,000X5%=300,000
We make the pro-forma balance sheet
Baldwin Products
Pro Forma Balance Sheet
Dec 31, 2006
(Millions of Dollars)
2005 Forecast Basis Additions Pro Forma Financing Pro Forma after Financing
% of 2005
Sales
Cash 200,000 5.0% 300,000 300,000
Receivables 400,000 10.0% 600,000 600,000
Inventories 1,200,000 ...

Solution Summary

The solution explains some problems relating to Balance Sheet and Forecasting Calculations - Cash budgets and External financing

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