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    Fluffy's Cat Farms
    A Delaware Company
    Pro-forma and Actual Results (Income Statement)
    As of December 31 of the year indicated.

    2005 (Actual) 2006 (Pro-Forma)
    Sales 100 250
    Cost of Goods Sold 50 100
    Gross Margin 50 150
    Rent and Utilities 10 20
    Selling General and Admin 20 50
    Total Operating Expenses 30 70
    Depreciation 10 40
    EBIT 20 30
    Interest Expense 0 10
    EBT 20 20
    Taxes 6 6
    Net Income 14 14

    29. What is the likely assumption implicit in the forecast of Cost of Goods Sold in 2006?

    a. The company will purchase direct material and labor as efficiently as in 2005.
    b. The company will enjoy an economy of scale in purchase of direct material and labor in 2006.
    c. The cost of labor will decrease due to the increased investment in capital goods.
    d. Both b and c could be correct.

    30. What is the likely cause of the increase in depreciation expense in the pro-forma income statement between 2005 and 2006?

    a. Increased investment is necessary to sustain the large growth in sales.
    b. Prior years investments are beginning to be felt as increased depreciation expenses on the income statement.
    c. The company made a mistake in reporting depreciation in 2005 and corrected it by overstating the reported amount in 2006, as required by the Sarbanes Oxley Act of 2004.
    d. None of these is a likely cause of the increase.

    31. In which year is the cash flow of the company likely to be under more stress (e.g. lower)?

    a. 2005
    b. 2006
    c. Can not be determined from the given data.
    d. Both years are likely to experience the same cash flow since net income is equal.

    32. What is the implied compound growth rate for Fluffy Cat Farms if the sales projection in year 3 is 400?

    a. 25%
    b. 33%
    c. 58%
    d. 400%
    33. Given the high rate of growth implied in Fluffys Cat Farms, what is the likely source of capital for the firm:

    a. A balanced mix of debt and equity.
    b. Mostly Debt, little equity
    c. Mostly Equity, little debt
    d. None of these

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    Solution Preview

    29. What is the likely assumption implicit in the forecast of Cost of Goods Sold in 2006?

    d. Both b and c could be correct.

    This is because there is increase in depreciation which indicates increase in capital investment,
    and also there is increase in economies of scale.

    30. What is the likely ...

    Solution Summary

    This job explores source of capital and other factors in the case.