-2 a. Noso Textiles
Pro Forma Income Statement
December 31, 2005
($ thousands)
Pro Forma
2005 (1 + g) 2006
Sales $36,000 (1.15) $41,400
Operating costs (32,440) (1.15) (37,306)
EBIT $ 3,560 $ 4,094
Interest ( 560) ( 560)
EBT $ 3,000 $ 3,534
Taxes (40%) ( 1,200) ( 1,414)
Net income $ 1,800 $ 2,120
Dividends (45%) $ 810 $ 954
Addition to RE $ 990 $ 1,166
Noso Textiles
Pro Forma Balance Sheet
December 31, 2005
($ thousands)
Pro Forma
After
2005 (1 + g) Additions Pro Forma Financing Financing
Cash $ 1,080 (1.15) $ 1,242 $ 1,242
Accounts receivable 6,480 (1.15) 7,452 7,452
Inventories 9,000 (1.15) 10,350 10,350
Total curr. assets $16,560 $19,044 $19,044
Fixed assets 12,600 (1.15) 14,490 14,490
Total assets $29,160 $33,534 $33,534
Accounts payable $ 4,320 (1.15) $ 4,968 $ 4,968
Accruals 2,880 (1.15) 3,312 3,312
Notes payable 2,100 2,100 +2,128 4,228
Total current liabilities $ 9,300 $10,380 $12,508
Long-term debt 3,500 3,500 3,500
Total debt $12,800 $13,880 $16,008
Common stock 3,500 3,500 3,500
Retained earnings 12,860 1,166* 14,026 14,026
Total liab. and equity $29,160 $31,406 $33,534
AFN = $ 2,128
*From income statement.
b. Δ interest expense = $2,128 x 0.10 = $213.
1st Pass Financing 2nd Pass
2006 Feedback 2006
Sales $41,400 $41,400
Operating costs (37,306) (37,306)
EBIT $ 4,094 $ 4,094
Interest (560) +213* (773)
EBT $ 3,534 $ 3,321
Taxes (40%) (1,414) (1,328)
Net income $ 2,120 $ 1,993
Dividends (45%) $ 954 $ 897
Addition to retained earnings $ 1,166 $ 1,096
*This is the interest at 10 percent on the $2,128 additional notes payable.
Δ in RE because of feedback = $1,096 - $1,166 = -$70.
1st Pass Financing 2nd Pass
2006 Feedback 2006
Total assets $33,534 $33,534
Accounts payable $ 4,968 $ 4,968
Accruals 3,312 3,312
Notes payable 4,228 4,228
Total current liabilities $12,508 $12,508
Long-term debt 3,500 3,500
Total debt $16,008 $16,008
Common stock 3,500 3,500
Retained earnings 14,026 -70* 13,956
Total liabilities and equity $33,534 $33,464
AFN = $ 70
*See income statement.
Thus, the original AFN amount has been reduced after an additional iteration from $2,128 to $70. The total AFN for both passes is $2,198.
12-4 a., b., & c. Woods Company
Pro Forma Income Statement
December 31, 2005
($ thousands)
1st Pass AFN 2nd Pass
2005 (1 + g) 2006 Effects 2006
Sales $8,000 (1.2) $9,600 $9,600
Operating costs (7,450) (1.2) (8,940) (8,940)
EBIT $ 550 $ 660 $ 660
Interest ( 150) ( 150) +30* ( 180)
EBT $ 400 $ 510 $ 480
Taxes (40%) ( 160) ( 204) ( 192)
Net income $ 240 $ 306 $ 288
Dividends : $1.04 x 150 = $ 156 $1.10 x 150 = $ 165 +24** $ 189
Addition to
retained earnings: $ 84 $ 141 $ 99
Number of shares outstanding = NI/EPS = $240/$1.60 = 150
*Δ in interest expense = ($51 + $248) x 0.10 = $30.
**Δ in 2005 Dividends = # of new shares issued x DPS = $368/$16.96 x $1.10 = $24
Δ in addition to retained earnings = $99 - $141 = -$42.
Woods Company
Pro Forma Balance Sheet
December 31, 2005
($ thousands)
1st Pass AFN 2nd Pass
2005 (1 + g) 2006 Effects 2006
Cash $ 80 (1.2) $ 96 $ 96
Accounts receivable 240 (1.2) 288 288
Inventory 720 (1.2) 864 864
Total current assets $1,040 $1,248 $1,248
Fixed assets 3,200 (1.2) 3,840 3,840
Total assets $4,240 $5,088 $5,088
Accounts payable $ 160 (1.2) $ 192 $ 192
Accruals 40 (1.2) 48 48
Notes payable 252 252 +51** 303
Total current liabilities $ 452 $ 492 $ 543
Long-term debt 1,244 1,244 +248** 1,492
Total debt $1,696 $1,736 $2,035
Common stock 1,605 1,605 +368** 1,973
Retained earnings 939 141* 1,080 -42*** 1,038
Total liab. and equity $4,240 $4,421 $5,046
AFN = $ 667 $ 42
*See income statement, 1st pass.
**CA/CL = 2.3; D/A = 40%.
Maximum total debt = 0.4 x $5,088 = $2,035.
Maximum increase in debt = $2,035 - $1,736 = $299.
Maximum current liabilities = $1,248/2.3 = $543.
Increase in notes payable = $543 - $492 = $51.
Increase in long-term debt = $299 - $51 = $248.
Increase in common stock = $667 - $299 = $368.
***See income statement, 2nd pass.
12-12 a.
SOpBE = Q x P = (40,000)($5) = $200,000.
b. At operating BEP, EBIT = 0, so the financing section of Straight Arrow’s income statement would be:
EBIT $ 0
Interest ($10,000)
Earning before taxes ($10,000)
Taxes (40%) 4,000
Net income ($ 6,000)
Preferred dividends ( 0)
Earnings available to common stockholders ($ 6,000)
EPS = ($6,000)/20,000 = ($0.30)
c. Because Straight Arrow has no preferred stock, its financial BEP is $10,000. The number of sleeves of golf balls that needs to be sold to cover this $10,000 is:
Thus, Straight Arrow needs to sell 8,000 sleeves of balls in addition to the operating breakeven amount of 40,000 sleeves. If Straight Arrow’s sales equal 48,000 sleeves, its income statement would be:
Sales = 48,000 x $5 $240,000
Variable costs = 48,000 x $5(0.75) ( 180,000)
Gross profit 60,000
Fixed costs ( 50,000)
EBIT 10,000
Interest ($10,000)
Earning before taxes ( 0)
Taxes (40%) 0
Net income 0
Preferred dividends ( 0)
Earnings available to common stockholders $ 0
EPS = $0/20,000 = $0.00
d. If sales equal $300,000, the income statement would be:
Sales $300,000
Variable costs (0.75) (225,000)
Gross profit 75,000
Fixed costs ( 50,000)
EBIT 25,000
Interest ($10,000)
Earning before taxes 15,000
Taxes (40%) ( 6,000)
Net income = EAC $ 9,000
EPS = $9,000/20,000 = $0.45
EPS$270,000 = $0.45[1 + (-0.10)(5.0)] = $0.225