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    Pro Forma Financial Statements and Free Cash Flow Computation

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    Prepare a pro forma income statement and balance sheet for Webb Enterprises, found in Problem 6-7, where revenues are expected to grow by 20% in 2016. Make the following assumptions in making your forecast of the firm's balance sheet for 2016:

    ■ The income statement expenses are a constant percent of revenues except for interest, which remains equal in dollar amount to the 2015 level, and taxes, which equal 40% of earnings before taxes.

    ■ The cash and marketable securities balance remains equal to $500, and the remaining current asset accounts and fixed assets increase in proportion to revenues for 2015.

    ■ Net property, plant, and equipment increase in proportion to the increase in revenues and depreciation expenses for 2016 is $2000.

    ■ Accounts payable increases in proportion to firm revenues.

    ■ Owners' equity increases by the amount of firm net income for 2016 (no cash dividends are paid).

    ■ Long-term debt remains unchanged, and short-term debt changes in an amount that balances the balance sheet.

    6-13 FORECASTING FIRM FCF Using your pro forma financial statements from Problem 6-12, estimate the firm's FCF for 2016.

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    Solution Summary

    This solution illustrates how to create a pro forma income statement and balance sheet using the prior year's financial statements and estimated changes in each account. It also illustrates how to compute free cash flows using the pro forma financial statements.