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Proforma Financial Statements for Dynastics Corporation

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The following tables contain financial statements for Dynastatics Corporation. Although the company has not been growing, it now plans to expand and will increase net fixed assets (that is, assets net of depreciation) by \$200,000 per year for the next 5 years and forecasts that the ratio of revenues to total assets will remain at 1.50. Annual depreciation is 10 percent of net fixed assets at the start of the year. Fixed costs are expected to remain at \$56,000 and variable costs at 80 percent of revenue. The company's policy is to pay out two- thirds of net income as dividends and to maintain a book debt ratio of 25 percent of total capital.

a. Produce a set of financial statements for 2004. Assume that net working capital will equal 50 percent of fixed assets.
b. Now assume that the balancing item is debt and that no equity is to be issued. Prepare a completed pro forma balance sheet for 2004. What is the projected debt ratio for 2004?

INCOME STATEMENT, 2003

(figures in thousands of dollars)
Revenue \$1,800
Fixed costs 56
Variable costs (80% of revenue) 1,440
Depreciation 80
Interest (8% of beginning-of-year debt) 24
Taxable income 200
Taxes (at 40%) 80
Net income \$ 120
Dividends \$80
Retained earnings \$40

BALANCE SHEET, YEAR-END
(figures in thousands of dollars)
2003
Assets
Net working capital \$ 400
Fixed assets 800
Total assets \$ 1,200
Liabilities and shareholders' equity
Debt \$ 300
Equity 900
Total liabilities and shareholders' equity \$ 1,200

Solution Preview

a. First, we know that fixed assets will be increasing by \$200,000 net
of depreciation in 2001, bringing fixed assets to \$1 million (800,000 existing +200,000).
Net working capital will equal 50% of fixed assets, net
working capital becomes \$500,000. This leaves the firm with total
assets of \$1,500,000.

For the balance sheet to balance, the sum of the total liabilities and
shareholders' equity must therefore equal \$1,500,000. In order to
maintain a book debt ...

Solution Summary

The solution explains how to prepare proforma financial statements given the assumptions in 300 words with proforma statements included in an attached Word document.

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