Explore BrainMass

Explore BrainMass

    Proforma Financial Statements for Dynastics Corporation

    This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

    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?


    (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

    (figures in thousands of dollars)
    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

    © BrainMass Inc. brainmass.com December 15, 2020, 12:43 pm ad1c9bdddf


    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.