Estimating Financing Needs Homework Assignment

Estimating Financing Needs Homework Assignment

In your accounting
course, you learned about the income statement that provides a record of what
led to net income for the year. Just as you might develop a forecast of the
future year’s budget, financial professionals forecast future income by
developing a one-year forecast of the firm’s income statement, more commonly
known as the pro forma income statement. Taken together with assumptions about
future assets, liabilities, and retained earnings, one can estimate future
long-term financing needs for the corporation.

For this Assignment, complete Problems 17-7 (one year pro
forma statement) and 17-8
(total liabilities estimation and forecast of long-term debt financing need)
in your course text.

In addition, provide
two or more suggestions on what Arrington, Inc. could do to reduce the
forecasted debt financing (the managerial part of financing). Be sure to
provide rationales as to why your suggestions will be effective in reducing the
forecasted debt financing need.

Problem 17-7

17-7 PRO
FORMA INCOME STATEMENT At the end of last year, Roberts Inc. reported the
following income statement (in millions of dollars):

Sales $3,000

Operating
costs excluding depreciation 2,450

EBITDA $ 550

Depreciation 250

EBIT $ 300

Interest 125

EBT $ 175

Taxes
(40%) 70

Net income $ 105

Looking
ahead to the following year, the company’s CFO has assembled this information:

• Year-end
sales are expected to be 10% higher than the $3 billion in sales generated last
year.

• Year-end
operating costs, excluding depreciation, are expected to equal 80% of year-end
sales.

•
Depreciation is expected to increase at the same rate as sales.

• Interest
costs are expected to remain unchanged.

• The tax
rate is expected to remain at 40%.

On the
basis of that information, what will be the forecast for Roberts’ year-end net
income?

Problem 17-8

LONG-TERM FINANCING NEEDED

At year-end 2018, total assets for Arrington Inc. were $1.8
million and accounts payable were $450,000. Sales, which in 2018 were $3.0
million, are expected to increase by 25% in 2019. Total assets and accounts
payable are proportional to sales, and that relationship will be maintained;
that is, they will grow at the same rate as sales. Arrington typically uses no
current liabilities other than accounts payable. Common stock amounted to
$500,000 in 2018, and retained earnings were $475,000. Arrington plans to sell
new common stock in the amount of $130,000. The firm’s profit margin on sales
is 5%; 35% of earnings will be retained.

a. What were Arrington’s total liabilities in
2018?

b. How much new long-term debt
financing will be needed in 2019?

(Hint: AFN − New stock = New long-term debt.)