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AFN and proforma balance sheet

The Landis Corporate had 2008 sales of $100 million. The balance sheet items that vary directly with sales and the profit margin are below:

Cash: 5%
Accounts receivable: 15%
Inventory : 25%
Net fixed assets: 40%
Accounts payable: 15%
Accruals: 10%
Profit margin after tax: 6%

The dividend payout rate is 50% of earnings, and the balance in retained earnigs at the end of 2008 was $33 million. Common stock is constant at $10 million and long term bonds are constant at $5 million. Notes payable are currently $12 million.

a. How much additional external capital will be required for next year if sales increase 15%.? Assume the company is already operating at full capacity.
Hint: You neexd to do a pro forma income statement, balance sheet etc. for 2008 then calculate the funds needed in 2009.

b. Revise the pro forma balance sheet for 2009 assuming that any external funds will be in the form of notes payable.

c. What will happen to external fund requirements if they reduce the payout ratio, grow at a slower rate, or experience a decline in profit margin. Discuss each of these separately, but do not calculate.

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Solution Summary

The solution explains how to determine amount of additional financing needed and prepare a proforma balance sheet