1.

Pro Forma Statements

Soul Mate Textiles current financial statements are shown below:

Income Statements
Soul Mate Textile
For the year ended December 31
(thousands of dollars)
Sales
Cost of goods sold
Other expenses
Total operating costs
Earnings before interest and taxes
Interest expense
Earnings before taxes
Taxes (40%)
Earnings after taxes
Dividends (45%)
Addition to retained earnings

$ 36,000
20,000
12,440
$ 32,440
$ 3,560
560
$ 3,000
1,200
$ 1,800
$
810
$
990

Balance Sheets
Soul Mate Textile
December 31
(thousands of dollars)
Assets
Cash
Accounts receivable
Inventories
Total current assets
Net fixed assets
Total assets
Liabilities and stockholders' equity
Accounts payable
Notes payable
Accruals
Total current liabilities
Long term bonds
Total liabilities
Stockholders' equity
Common stock at par
Retained earnings
Total stockholders' equity
Total liabilities and stockholders' equity

1,080
6,480
9,000
$ 16,560
12,600
$ 29,160
$

4,320
2,100
2,880
$ 9,300
$ 3,500
$ 12,800
$

3,500
12,860
$ 16,360
$ 29,160

Using the assumptions that are given below, please prepare the Soul Mate Textiles pro
forma statements for the next year:
a. Suppose the sales are projected to increase by 10 percent over the current years sales.
b. Company cannot sell any of its fixed assets.
c. Assets (both current and fixed) and current liabilities are expected to increase by the
same percentage as sales.
d. $800 new issue of bond will be sold and also $1,200 at par new issue of common
stocks.
2. Cash Budget (30%)

Patricia, owner of Pats Fashion Design Inc., is planning to request a line of credit from
her bank. She has estimated the following sales forecasts for the firm for parts of 2009:
August 2009 $ 540,000
September
720,000
October
360,000
November
360,000
December
90,000
Collection estimates obtained from the credit and collection department are as follows:
collections within the month of sale, 10 percent; collections the month following the sale,
75%; collections the second month following the sale, 15%.
Payments for labor and raw materials are typically made during the month following the
one in which these costs have been incurred. Total labor and raw materials costs are
estimated for each month as follows:
August 2009 $ 882,000
September
306,000
October
234,000
November
162,000
December
90,000
General and administrative salaries will amount to approximately $27,000 a month; lease
payments under long term lease contracts will be $9,000 a month; depreciation charges
will be $36,000 a month; miscellaneous expenses will be $2,700 a month; and income tax
payments of $63,000 will be due in both November and December.
Cash on hand on October 1 will amount to $132,000, and a minimum cash balance of
$90,000 will be maintained throughout the cash budget period.
Based on the data above, you are asked to prepare a monthly cash budget for the last
three months of 2009!
3. Time Value of Money (20%)

a. To complete your last two years in business school and then go through law school,
you will need $10,000 for the first year school fee (that is, you will need to withdraw
the first year school fee two years from today). Your rich uncle offers to put you
through school, and he will deposit in a bank paying 7 percent interest a sum of
money that is sufficient to provide the $10,000 school fee. His deposit will be made
today. How large must the deposit be?

b. Diane wants to buy a car that costs $12,000. She has arranged to borrow the total
purchase price of the car from her credit union at a simple interest rate equal to 12
percent. The loan requires quarterly payments for a period of three (3) years. If the
first payment is due three months (one quarter) after purchasing the car, what will be
the amount of Dianes quarterly payments on the loan?
c. An investor wants to have $1 million when she retires in 20 years. If she can earn a
10% annual return, compounded semiannually, on her investments, how much is the
lump-sum amount she would need to invest today to reach her goal?
d. What is the net present value (NPV) for a berry patch that costs $3,000 to plant in
year 1, then generates a net return of $2,500 in years 2 and 3 and $1,000 in year 4,
assuming a 10% discount rate?
4. Pro Forma Statements

Medigel Inc.s 2010 financial statements are shown here.

Balance Sheets
Medigel Inc.
December 31, 2010
Assets
Cash
Accounts receivable
Inventories
Total current assets
Net fixed assets
Total assets
Liabilities and stockholders' equity
Accounts payable
Notes payable
Accruals
Total current liabilities
Stockholders' equity
Common stock at par
Retained earnings
Total stockholders' equity
Total liabilities and stockholders' equity

180,000
360,000
720,000
$ 1,260,000
1,440,000
$ 2,700,000
$
$

360,000
156,000
180,000
696,000

$ 1,800,000
204,000
$ 2,004,000
$ 2,700,000

Income Statements
Medigel Inc.
For the year ended December 31, 2010
Sales
$ 3,600,000
Operating costs
3,279,720
EBIT
320,280
Interest expense
20,280
Earnings before taxes
$ 300,000
Taxes (40%)
120,000
Earnings after taxes
$ 180,000
Common Stock Dividends
108,000
Retained Earnings
$
72,000
Per share data:
Common stock price
Earnings per share (EPS)
Dividends per share (DPS)

$ 24.00
$ 1.80
$ 1.08

Using the assumptions that are given below, please prepare the Medigels pro forma
statements for the next year:
a. Suppose that in 2011 sales increase by 12% over 2010 sales and that DPS will
increase to $1.12.
b. The percents of sales for items that vary directly with sales are as follows:
Accounts receivable, 10%
Inventory, 15%
Accounts payable, 12%
c. Notes payable are expected to remain unchanged.
d. A minimum cash balance of $240,000 is desired.
e. A new machine costing $300,000 will be acquired in 2011, and equipment costing
$210,000 will be purchased in 2011. Total depreciation in 2011 is forecast as
$125,000.
f. Accruals are expected to rise to $280,000 by the end of 2011.
g. No sale or repurchase of common stock is expected.
5. Cash Budget

The actual sales and purchases for Eastern Digital, Inc., for November and December
2010, along with its forecast sales and purchases for the period January through April
2011, follow:
Year Month
Sales
Purchases
2010 November
$100,000
$40,000
2010 December
150,000
75,000
2011 January
120,000
50,000
2011 February
140,000
60,000
2011 March
200,000
90,000
2011 April
240,000
130,000

The firm makes 30% of all sales for cash and collects on 35% of its sales in each
of the 2 months following the sale.
Other cash inflows are expected to be $14,000 in January and March, and $23,000
in February.
The firm pays cash for 20% of its purchases. It pays for 50% of its purchases in
the following month and for 30% of its purchases 2 months later.
Wages and salaries amount to 15% of the preceding months sales. Rent of
$15,000 per month must be paid. Interest payments of $7,500 are due in January
and April. A principal payment of $18,000 is also due in April. The firm expects
to pay cash dividends of $12,500 in January and April. Taxes of $60,000 are due
in April. The firm also intends to make a $20,000 cash purchase of fixed assets in
March.

Assuming that the firm has a cash balance of $18,000 at the beginning of January and
wishes to maintain a $10,000 minimum cash balance, you are asked to prepare and
interpret a cash budget for the months of January, February, March and April.
6. Time Value of Money

a. Twenty years ago, an investor bought a share of stock for $10. The stock has paid no
dividends during this period, yet it has returned 14%, compounded semiannually,
over the past 20 years. If it is true, how much is the share price now?
b. If $10,000 is invested today in an account that earns interest rate of 10%, what is the
value of the equal withdrawals that can be taken out of the account at the end of
each of the next five years if the investor plans to deplete the account at the end of the
time period?
c. If $1,000 is invested today and $1,000 is invested at the beginning of each of the
next three years at 12% interest (compounded annually). How much the amount an
investor will have at the end of the fourth year will be?
d. Given an 8.5% discount rate, an asset that generates cash flows of $10 in Year 1, $20 in Year 2, $10 in Year 3, and is then sold for $150 at the end of Year 4, how
much is the present value of that cash flows?

7. Financial Statement & Analysis

The TSM Corporations 2009 financial statements follow, along with some industry
average ratios and the corporations 2008 financial ratios.
TSM Corporation: Balance Sheet as of December 31
Cash

2009
72,000

Accounts Receivable

439,000

Inventories

894,000

Total Current Assets

$ 1,405,000

Land and Building

238,000

Machinery

132,000

Other Fixed Assets

Total Assets

61,000
$ 1,836,000

Accounts and Notes

Payable

Accrued Liabilities
Total Current Liabilities

432,000
170,000

602,000

Long Term Debt

404,290

Common Stock

575,000

Retained Earnings

254,710

Total Liabilities and Equity

$ 1,836,000

TSM Corporation: Income Statement for Years Ending December 31

2009
Sales

$4,240,000

Cost of Goods Sold

Gross Profit

3,680,000
$ 560,000

General administrative and selling expenses

236,320

Depreciation
Miscellaneous

159,000

Earnings before taxes

134,000

Taxes (40%)

Net Income

30,680
12,272

18,408

2009

2008

Industry
Ratioa

Per Share Data

EPS

$ 0.80

$ 4.17

Cash Dividends

$ 1.10

$ 0.95

Market Price (Average)

$ 12.34

$ 23.57

Number of shares

23,000

23,000

outstanding
Financial Ratios
Current Ratio

2.5 x

2.7 x

Inventory Turnover

9.0 x

7.0 x

35 days

32 days

Total Assets Turnover

4.2 x

2.6 x

Return on Assets

8.5 %

9.1 %

Return on Equity

20.1 %

18.2 %

Debt Ratio

48 %

50.0 %

Net Profit Margin

4.8 %

3.5 %

P/E Ratio

5.7 x

6.0 x

Market to Book Value Ratio

4.2 x

3.5 x

Average Collection Periodb

Industry average have

been constant for the past 4
years
b
Calculation is based on a
365-day year

Please assess TSMs financial position, and determine how it compares with
peers (industry) and how the financial position has changed over time.

8. Cash Flow & Financial Planning

Income Statement
Betutu Company
Sales revenue
Less: Cost of goods sold
Fixed costs
Variable costs

$3,028,500
1,350,000
1,260,600
-------------$417,900

Gross profits
Less: Operating expenses
Fixed expenses
Variable expenses

4,500
85,840
-----------$327,560
82,150
------------$245,410
98,164
------------$147,246
50,000
------------$ 97,246

Operating profits
Less: Interest expense
Net profits before taxes
Less: Taxes (40%)
Net profits after taxes
Less: Dividend
Increased retained earnings

Balance Sheet
Betutu Company
ASSETS
Current assets
Cash
Marketable securities
Accounts receivable
Inventories
Total current assets
Land and building
Machinery & equip.
Fixtures & Furn.
Total gross fixed assets
Less: Accumulated Depreciation
Net fixed assets
Total assets

$625,000
298,000
580,000
496,000
-------------$1,999,000
625,000
765,000
110,000
1,500,000
30,000
$1,470,000
----------$3,469,000

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities
Accounts payable
Notes payable
Accruals
Total current liabilities
Long-term debts
Total liabilities
Stockholders' equity
Preferred stock
Common stock
Paid-in-capital
Retained earnings
Total stockholders' equity
Total liabilities and stockholders
equity
----------------------------------------------------

$267,000
135,000
288,000
------------$690,000
1,200,000
------------$1,890,000
79,000
750,000
601,000
149,000
------------$1,579,000
------------$3,469,000

The Betutu Company is trying to plan for the next year. Using the current income statement
and balance sheet given above, and the additional information provided, prepare the company's
pro forma statements.

1.
2.
3.
4.
5.
6.
7.
8.
9.

Sales are projected to increase by 15%.

Total of $75,000 in dividend will be paid.
A minimum cash balance of $650,000 is desired.
A new asset for $50,000 will be purchased.
Depreciation expense for next year is $50,000.
Marketable securities will remain the same.
Accounts receivable, inventory, accounts payable, notes payable, and
accruals will increase by 15%.
$30,000 new issue of bond will be sold.
No new stock will be issued.

9. Time Value of Money (25%)

It is now January 1, 2006, and you will need $1,000 in January 1, 2010, in 4 years.
Your bank compounds interest at an 8 percent annual rate.
a. How much must you deposit today to have a balance of $1,000 on January 1,
2010?
b. If you want to make 4 equal payments on each January 1 from 2007 through 2010
to accumulate the $1,000, how large must each payment be? (Note that the
payments begin a year from today.)
c. If you have only $750 on January 1, 2007, what interest rate, compounded annually
for 3 years, must you earn to have $1,000 on January 1, 2010?
d. Your father offers to give you $400 on January 1, 2007. You will then make 6
additional equal payments each 6 months from July 2007 through January 2010. If
your bank pays 8 percent, compounded semiannually, how large must each
payment be for you to end up with $1,000 on January 1, 2010?

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