You have been recently hired as a financial manager at BeHappy.Co. Your first task is to report to your boss how much external funding is needed based on a future sales projection for next year. From the accounting department you gathered some figures in fiscal year 2017 (units are millions of dollars): $250 in Accounts payable, $500 in Accounts receivable, $250 in Capital surplus, $400 in Cash and equivalents, $100 in Common stock ($1 par value), $1,000 in Cost of goods sold, $250 in Intangible assets and others, $150 in Interest expenses, $400 in Inventory, $3,000 in Long-term debt, $8,000 in Property, plant and equipment, $2,750 in Retained earnings, $2,500 in Sales, $700 in Selling, general and administrative expenses.
Also you learned that all of the property, plant and equipment were purchased in 2007 (10 years ago), have estimated useful life of 25 years, will have no salvage value once they retire and are depreciated using the straight-line depreciation method. The income tax rate is 35% and all taxes are current (i.e. no deferred taxes). The retention ratio is 60% and BeHappy.Co. plans to maintain its dividend payout policy for the next decade. BeHappy.Co. has neither Accrued expenses nor Preferred stock and has not repurchased outstanding shares.
1. Construct a balance sheet for BeHappy.Co. in 2017. (a) Report the amounts of total assets, total liabilities and shareholders’ equity. Does the balance sheet identity hold?
2. Construct an income statement for BeHappy.Co. in 2017. (a) What is the profit margin? Sales is expected to increase by 25% next year.
It is assume that all the costs, current assets and account payable vary directly with sales while long-term debt and common stock values remain the same regardless of the sales projection. Interest expenses, tax rate and retention ratio are assumed to be the same while the amount of depreciation increases to $368.75. Since BeHappy.Co. has not utilized its plants and equipments at full capacity, total fixed assets will only increase by half of the sales growth rate (that is, total fixed assets will increase by 12.5% if sales grow at 25%.)
3. Construct a Pro-forma income statement. (a) Report the profit margin. Is this the same as the one in Q2(a)? State your reasoning. (b) What is the addition to retained earning?
4. Construct a Pro-forma balance sheet of BeHappy.Co. (Note: You do not have to detail how each entry for fixed assets will be affected. Simply adjust total fixed assets only.) (a) Calculate the external financing needed (EFN). Can you use the EFN formula given in the textbook (eq.[3.23]) instead of building Pro-forma financial statements? Provide your reasoning.