1. Develop a pro forma income statement and balance sheet for the White & Pinkman Corporation. The company's 2015 financial statements are shown below. Base your forecast on the financial statements and the following assumptions:
• Sales growth is predicted to be 20 percent in 2016.
• Cost of goods sold, selling and administrative expense, all current assets, accounts payable, and accrued expenses will remain the same percentage of sales as in 2015.
• Depreciation expense, interest expense, gross plant and equipment, notes payable, long-term debt, and equity accounts other than retained earnings in 2016 will be the same as in 2015.
• The company's tax rate in 2016 will be 40 percent.
• The same dollar amount of dividends will be paid to common stockholders in 2016 as in 2015.
• Bad debt allowance in 2016 will be the same percentage of accounts receivable as it was in 2015.
White & Pinkman Corporation Income Statement for 2015
Sales $ 10,000,000
Cost of Goods Sold 4,000,000
Gross Profit 6,000,000
Selling and Administrative Expenses 800,000
Depreciation Expense 2,000,000
Earnings before Interest and Taxes (EBIT) 3,200,000
Interest Expense 1,350,000
Earnings before Taxes (EBT) 1,850,000
Taxes (40%) 740,000
Net Income (NI) 1,110,000
Earnings per Share (EPS) (1 million shares) $ 1.11
Common Stock Dividends Paid 400,000
Addition to Retained Earnings 710,000
White & Pinkman Corporation balance Sheet Dec. 31, 2015
assets:
Current Assets:
Cash $ 9,000,000
Marketable Securities 8,000,000
Accounts Receivable (Net) 1,000,000
Inventory 20,000,000
Prepaid Expenses 1,000,000
Total Current Assets $ 39,000,000
Fixed Assets: 11,000,000
Plant and Equipment (Gross) 20,000,000
Less Accumulated Depreciation (9,000,0000 )
Plant and Equipment (Net) 11,000,000
Total Assets $ 50,000,000
Liabilities and Equity:
Current Liabilities:
Accounts Payable $ 12,000,000
Notes Payable 5,000,000
Accrued Expenses 3,000,000
Total Current Liabilities $ 20,000,000
Bonds Payable (5%, due 2025) 20,000,000
Total Liabilities $ 40,000,000
Common Stock (1 mil. shares, $1 par) 1,000,000
Capital in Excess of Par 4,000,000
Retained Earnings 5,000,000
Total Equity 10,000,000
Total Liabilities and Equity $ 50,000,000
2. a. Calculate White & Pinkman's additional funds needed, or excess Financing. If additional funds are needed, add them to long-term debt to bring the balance sheet into balance. If excess financing is available, increase common stock dividends paid (and, therefore, decrease 2016 retained earnings) until the balance sheet is in balance.
b. Calculate White & Pinkman's current ratio for the end of 2015 and 2016.
c. Calculate White & Pinkman's total asset turnover and inventory turnover ratios for 2016.
d. Calculate White & Pinkman's total debt to total assets ratio for 2015 and 2016. Assume there has been no additional long-term debt issued in 2016.
e. Calculate White & Pinkman's net profit margin, return on assets, and return on equity ratios for 2015 and 2016.
3. Comment on White & Pinkman's liquidity, asset productivity, debt management, and profitability based on the results of your ratio analysis in 2b through 2e
4. What recommendations would you provide to management based on your forecast and analysis?