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source of capital

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


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.