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    pro forma balance sheet

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    Building Financial Models. 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?

    See attached file for full problem description.

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    Solution Preview

    Please see the attached file.

    (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)
    1999 2000
    Net working capital $400 $400
    Fixed assets 800 800
    Total assets $1,200 $1,200
    Liabilities and shareholders' equity
    Debt $300 $300
    Equity 900 900
    Total liabilities and shareholders' ...

    Solution Summary

    Ideas are given to formulate a pro forma balance sheet.