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Pro Forma Balance Sheet

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P3-14 Pro forma balance sheet Peabody & Peabody has 2006 sales of $10 million. It wishes to analyze expected performance and financing needs for 2008-2 years ahead. Given the following information, respond to parts a and b.

(1) The percents of sales for items that vary directly with sales are
as follows:
Accounts receivable, 12%
Inventory, 18%
Accounts payable, 14%
Net profit margin, 3%
(2) Marketable securities and other current liabilities are expected to remain
unchanged.
(3) A minimum cash balance of $480,000 is desired.
(4) A new machine costing $650,000 will be acquired in 2007, and equipment
costing $850,000 will be purchased in 2008. Total depreciation in 2007
is forecast as $290,000, and in 2008 $390,000 of depreciation will
be taken.
(5) Accruals are expected to rise to $500,000 by the end of 2008.
(6) No sale or retirement of long-term debt is expected.
(7) No sale or repurchase of common stock is expected.
(8) The dividend payout of 50% of net profits is expected to continue.
(9) Sales are expected to be $11 million in 2007 and $12 million in 2008.
(10) The December 31, 2006, balance sheet is given below.
LG5

a. Prepare a pro forma balance sheet dated December 31, 2008.
b. Discuss the financing changes suggested by the statement prepared in

part a.
Peabody & Peabody
Balance Sheet
December 31, 2006
($000)
Assets Liabilities and Stockholders' Equity
Cash $ 400 Accounts payable $1,400
Marketable securities 200 Accruals 400
Accounts receivable 1,200 Other current liabilities
Inventories Total current liabilities $1,880
Total current assets $3,600 Long-term debt $2,000
Net fixed assets Common equity
Total assets Total liabilities and
stockholders' equity $7,600
$7,600
$4,000 $3,720
1,800
80
INTERMEDIATE
Principles

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Solution Summary

The solution explains how to prepare a pro-forma Balance Sheet

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1. A firm's current balance sheet is as follows:
Assets $100 Debt $10
Equity $90
a. What is the firm's weighted-average cost of capital at various combinations of debt and equity, given the following information?

Debt/Assets After-Tax Cost of Debt Cost of Equity Cost of Capital
0% 8% 12% ?
10 8 12 ?
20 8 12 ?
30 8 13 ?
40 9 14 ?
50 10 15 ?
60 12 16 ?

b. Construct a pro forma balance sheet that indicates the firm's optimal capital structure. Compare this balance sheet with the firm's current balance sheet. What course of action should the firm take?
Assets $100 Debt $?
Equity $?

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