The following tables contain financial statements for Dynastatics Corporation. Although the company has not been growing, it now plans to expand and will increase net fixed assets (i.e., assets net of depreciation) by $240,000 per year for the next 5 years, and it forecasts that the ratio of revenues to total assets will remain at 1.50. Annual depreciation is 10% of net fixed assets at the beginning of the year. Fixed costs are expected to remain at $64 and variable costs at 80% of revenue. The company’s policy is to pay out two-thirds of net income as dividends and to maintain a book debt ratio of 20% of total capital. INCOME STATEMENT, 2019 (Figures in $ thousands) Revenue $ 1,800 Fixed costs 64 Variable costs (80% of revenue) 1,440 Depreciation 96 Interest (8% of beginning-of-year debt) 24 Taxable income 176 Taxes (at 40%) 70 Net income $ 106 Dividends $ 71 Addition to retained earnings $ 35 BALANCE SHEET, YEAR-END (Figures in $ thousands) 2019 Assets Net working capital $ 240 Fixed assets 960 Total assets $ 1,200 Liabilities and shareholders’ equity Debt $ 300 Equity 900 Total liabilities and shareholders’ equity $ 1,200 Required: a. Produce a balance sheet for 2020. Assume that net working capital will equal 50% of fixed assets. b. Now assume that the balancing item is debt and that no equity is to be issued. Prepare a completed pro forma balance sheet for 2020. c. Assume that the balancing item is debt and that no equity is to be issued, what is the projected debt ratio for 2022?

Corporate Fin Focused Approach

5th Edition

ISBN:9781285660516

Author:EHRHARDT

Publisher:EHRHARDT

Chapter12: Corporate Valuation And Financial Planning

Section: Chapter Questions

Problem 6P

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The following tables contain financial statements for Dynastatics Corporation. Although the company has not been growing, it now plans to expand and will increase net fixed assets (i.e., assets net of depreciation) by $240,000 per year for the next 5 years, and it forecasts that the ratio of revenues to total assets will remain at 1.50. Annual depreciation is 10% of net fixed assets at the beginning of the year. Fixed costs are expected to remain at $64 and variable costs at 80% of revenue. The company’s policy is to pay out two-thirds of net income as dividends and to maintain a book debt ratio of 20% of total capital.

INCOME STATEMENT, 2019 (Figures in $ thousands)
Revenue			$	1,800
Fixed costs				64
Variable costs (80% of revenue)				1,440
Depreciation				96
Interest (8% of beginning-of-year debt)				24
Taxable income				176
Taxes (at 40%)				70
Net income			$	106
Dividends	$	71
Addition to retained earnings	$	35

BALANCE SHEET, YEAR-END (Figures in $ thousands)
	2019
Assets
Net working capital	$	240
Fixed assets		960
Total assets	$	1,200
Liabilities and shareholders’ equity
Debt	$	300
Equity		900
Total liabilities and shareholders’ equity	$	1,200

Required:

a. Produce a balance sheet for 2020. Assume that net working capital will equal 50% of fixed assets.

b. Now assume that the balancing item is debt and that no equity is to be issued. Prepare a completed pro forma balance sheet for 2020.

c. Assume that the balancing item is debt and that no equity is to be issued, what is the projected debt ratio for 2022?

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