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4 Nov 2018

The following is the financial statement of Executive Fruit Company for the year ended December 2014.
INCOME STATEMENT, 2014
(Figures in $ Thousands)
Revenue $ 4,000
Cost of goods sold 3,600
EBIT $ 400
Interest 80
Earnings before taxes $ 320
State and federal tax 128
Net income $ 192
Dividends 128
Additions to retained earnings $ 64
BALANCE SHEET (Year-End, 2014)
(Figures in $ Thousands)
Assets
Net working capital $ 400
Fixed assets 1,600
Total assets $ 2,000
Liabilities and shareholders' equity
Long-term debt $ 800
Shareholders' equity 1,200
Total liabilities and shareholders' equity $ 2,000

The following are the first stage and second stage pro forma financial statements of Executive Fruit Company for the year ended December 2015.

First stage pro forma statements:
PRO FORMA INCOME STATEMENT, 2015
(Figures in $ Thousands)
Revenue $ 4,400
Cost of goods sold 3,960
EBIT $ 440
Interest 80
Earnings before taxes $ 360
State and federal tax 144
Net income $ 216
Dividends 144
Additions to retained earnings $ 72
PRO FORMA BALANCE SHEET (Year-End, 2015)
(Figures in $ Thousands)
Assets
Net working capital $ 440
Fixed assets 1,760
Total assets $ 2,200
Liabilities and shareholders' equity
Long-term debt $ 800
Shareholders' equity 1,272
Total liabilities and shareholders' equity $ 2,072
Required external financing $ 128
Second stage pro forma balance sheet:
PRO FORMA BALANCE SHEET (Year-End, 2015)
(Figures in $ Thousands)
Assets
Net working capital $ 440
Fixed assets 1,760
Total assets $ 2,200
Liabilities and shareholders' equity
Long-term debt $ 928
Shareholders' equity 1,272
Total liabilities and shareholders' equity $ 2,200

How would Executive Fruit’s financial model change if the dividend payout ratio were cut to 1/3? Use the revised model to generate a new financial plan for 2015 assuming that debt is the balancing item. What would be the required external financing? (Do not round intermediate calculations.)

Dividends fall by $ . Therefore, the requirement for external financing falls from $ to $ . On the other hand, shareholders' equity will be increased by $ .

The right-hand side of the balance sheet becomes (Do not round intermediate calculations. Enter your answers in thousands.):

Long-term debt $
Shareholders' equity
Total $

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Keith Leannon
Keith LeannonLv2
6 Nov 2018

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