FINS1613 Lecture Notes - Lecture 7: Pro Forma, Income Statement, Root Mean Square

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25 Jul 2018

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A thorough understanding of the relationships among the balance sheet, income statement, and cash ow statement can be developed by following the nancial events of a rm over a scal year. This problem illustrates how each pro forma incremental nancial statement relates to sales, purchases, capital expenditures, depreciation, taxes, and working capital items, such as inventories, accounts receivable, and accounts payable. For each year listed below, prepare the incremental balance sheet, incremental operating income statement, and incremental cash ow statement. A project begins its life with a ,000 cash allocation from the rm. This entire amount will be used to buy manufacturing equipment with a useful life of 10-years that will be depreciated at prime cost. During the scal year, the rm expects to sell 600 nished products at a price of . 00 each. The raw materials required are expected to cost . 50 per each.

Related Questions

Scenario: Your team has been hired to provide financial analysis for a start-up company, Bobble in Style, which produces customized bobble heads. The bobble heads are made out of less rigid materials and are more true to life than those of competitors. The company inventors, Mr. and Mrs. Lee, are going to pitch their idea to Shark Tank in a few months, but first they need to have a better understanding of the business financials. The Leeâs are already creating and selling their product from their home-based office and work area. They know what costs are involved with making the bobble heads on a small scale, but they donât have an understanding of financial figures beyond basic costs. They need you to make sense of various financial figures for them.

1. Financial Statements: Develop an Income Statement, Cash Flow Statement, and Balance Sheet based on the provided data for year 20XX (the previous year) that follows. Explain the purpose of each financial statement.

a. Income Statement Data for 20XX:

* Gross Sales = $33,291

* Coupons and Discounts = $549

*Cost of Goods = $10,276

* Labor = $0 (Mr. and Mr. Lee were the only ones working and did not pay themselves)

* advertising fees =$2000

* bank fees = $120

* phone/internet = $1200

* shipping = $1380

* utilities = $900

* office supplies = $785

* Income tax = 26 %

B. Cash Flow Statement Data for 20XX:

* Cash in bank = $21,120

* Depreciation = $800

* Proceeds from disposal of investment = $3,000

* Capital Expenditure = -$1,600

* Repayment of Bank Loan = -$5,000

* Interest Expense Associated with Bank Loan = -$345

* Consider any data relevant from the income statement.

C. Balance Sheet Data for 20XX:

* Cash = $21,120

* Accounts Receivable = $496

* Accounts Payable = $200

* Inventory = $10,507

* Accumulated Depreciation = -$1,000

* Common Stock = $0

2. Financial Ratios: Calculate the following financial ratios and explain the meaning of the results.

a. Net Profit Margin

b. Quick Ratio

c. Debt-to-Equity Ratio

3. Cost Classification: The Leeâs have provided you with the following costs and relevant information that are assumed for year 20XY. Classify the costs as variable costs or fixed costs. Explain the importance of distinguishing between variable and fixed costs. If business is expected to be steady from month to month, provide a monthly budget based on these figures.

a. Advertising Fees = $4,000

b. Labor = $400/month

One part-time employee will be hired to take care of packaging and shipping. This employee will be paid $10 per hour. He or she is estimated to work 40 hours total per month.

c. Packaging Supplies = $3,000

d. Office Supplies = $800

e. Phone and Internet Service = $115/month

f. Product Supplies = $9,000

g. Shipping Fees = $1,000/month

h. Conference Exhibitor Fee = $3,000

i. Travel Expenses for Conference (e.g. airfare, meals, taxi) = $1,200

j. Utilities for the Home Workshop = $105/month

4. Net Present Value: The Lees are considering adding a new piece of equipment that will speed up the process of building the bobble heads. The cost of the piece of equipment is $42,000. It is expected that the new piece of equipment will lead to cash flows of $17,000, $29,000, and $40,000 over the next 3 years. If the appropriate discount rate is 12%, what is the NPV of this investment? Explain the findings.

5. Budget Preparation: The Lees believe that there production could quadruple in one month after being on Shark Tank. They want to be prepared for this. Based on the monthly budget calculated above, create a new monthly budget for quadrupled production. Assume that 70 units were produced in the first budget and 280 units will be produced per month with the new budget.

6. Incremental Analysis: If production does increase dramatically after their presentation on Shark Tank, the Lees will need more space for production. They have two options. Option 1 is to rent out a spacious warehouse nearby. If they pursue this option, there rent will be $1,200 per month and utilities are estimated to cost an additional $350 per month. Their second option, Option 2, is to rent a smaller storefront space that is also nearby. The storefront rent is $1350 per month. However, utilities will likely only cost an additional $150 per month. They want to compare their options over one yearâs time (since each rental contract is a 1 year commitment). What is the incremental analysis if the Lees choose Option 1 over Option 2?

7. Break-Even Analysis: You have been asked to calculate how many units need to be sold to break even, based on the costs provided in task #3. Assume that only one conference will be attended and the estimated expenses associated with this conference are on target. Also assume that the value for total units per year is based on sales of 70 units per month. Therefore total units sold per year are 840. The selling price per unit is $79.

8. Contribution Margin: Based on the Break-Even Analysis just performed, what is the contribution margin per unit?

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Problem 12-7
Forecasted Statements and Ratios

Upton Computers makes bulk purchases of small computers, stocks them in conveniently located warehouses, ships them to its chain of retail stores, and has a staff to advise customers and help them set up their new computers. Upton's balance sheet as of December 31, 2013, is shown here (millions of dollars):

Cash	$ 3.5	Accounts payable	$ 9.0
Receivables	26.0	Notes payable	18.0
Inventories	58.0	Line of credit	0
Total current assets	$ 87.5	Accruals	8.5
Net fixed assets	35.0	Total current liabilities	$ 35.5
		Mortgage loan	6.0
		Common stock	15.0
		Retained earnings	66.0
Total assets	$122.5	Total liabilities and equity	$122.5

Sales for 2013 were $375 million and net income for the year was $11.25 million, so the firm's profit margin was 3.0%. Upton paid dividends of $4.5 million to common stockholders, so its payout ratio was 40%. Its tax rate is 40%, and it operated at full capacity. Assume that all assets/sales ratios, spontaneous liabilities/sales ratios, the profit margin, and the payout ratio remain constant in 2014. Do not round intermediate calculations.

If sales are projected to increase by $70 million, or 18.67%, during 2014, use the AFN equation to determine Upton's projected external capital requirements. Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answer to two decimal places.
$ million

Using the AFN equation, determine Upton's self-supporting growth rate. That is, what is the maximum growth rate the firm can achieve without having to employ nonspontaneous external funds? Round your answer to two decimal places.
%

Use the forecasted financial statement method to forecast Upton's balance sheet for December 31, 2014. Assume that all additional external capital is raised as a line of credit at the end of the year and is reflected (because the debt is added at the end of the year, there will be no additional interest expense due to the new debt).
Assume Upton's profit margin and dividend payout ratio will be the same in 2014 as they were in 2013. What is the amount of the line of credit reported on the 2014 forecasted balance sheets? (Hint: You don't need to forecast the income statements because you are given the projected sales, profit margin, and dividend payout ratio; these figures allow you to calculate the 2014 addition to retained earnings for the balance sheet.) Round your answers to the nearest cent.

Upton Computers Pro Forma Balance Sheet December 31, 2014 (Millions of Dollars)
Cash	$
Receivables	$
Inventories	$
Total current assets	$
Net fixed assets	$
Total assets	$
Accounts payable	$
Notes payable	$
Accruals	$
Total current liabilities	$
Mortgage loan	$
Common stock	$
Retained earnings	$
Total liabilities and equity	$

FINS1613 Lecture Notes - Lecture 7: Pro Forma, Income Statement, Root Mean Square

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