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 $350,000 per year for the next 4 years, and it forecasts that the ratio of revenues to total assets will remain at 1.50. Annual depreciation is 20% of net fixed assets at the beginning of the year. Fixed costs are expected to remain at $86 and variable costs at 70% of revenue. The company’s policy is to pay out one-half of net income as dividends and to maintain a book debt ratio of 20% of total capital. INCOME STATEMENT, 2019 (Figures in $ thousands) Revenue $ 2,160 Fixed costs 86 Variable costs (70% of revenue) 1,512 Depreciation 280 Interest (6% of beginning-of-year debt) 18 Taxable income 264 Taxes (at 35%) 92 Net income $ 172 Dividends $ 86 Addition to retained earnings $ 86 BALANCE SHEET, YEAR-END (Figures in $ thousands) 2019 Assets Net working capital $ 40 Fixed assets 1,400 Total assets $ 1,440 Liabilities and shareholders’ equity Debt $ 300 Equity 1,140 Total liabilities and shareholders’ equity $ 1,440 Required: a1. Produce an income statement for 2020. Assume that net working capital will equal 50% of fixed assets. a2. 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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Question

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 $350,000 per year for the next 4 years, and it forecasts that the ratio of revenues to total assets will remain at 1.50. Annual depreciation is 20% of net fixed assets at the beginning of the year. Fixed costs are expected to remain at $86 and variable costs at 70% of revenue. The company’s policy is to pay out one-half of net income as dividends and to maintain a book debt ratio of 20% of total capital.

INCOME STATEMENT, 2019 (Figures in $ thousands)
Revenue			$	2,160
Fixed costs				86
Variable costs (70% of revenue)				1,512
Depreciation				280
Interest (6% of beginning-of-year debt)				18
Taxable income				264
Taxes (at 35%)				92
Net income			$	172
Dividends	$	86
Addition to retained earnings	$	86

BALANCE SHEET, YEAR-END (Figures in $ thousands)
	2019
Assets
Net working capital	$	40
Fixed assets		1,400
Total assets	$	1,440
Liabilities and shareholders’ equity
Debt	$	300
Equity		1,140
Total liabilities and shareholders’ equity	$	1,440

Required:

a1. Produce an income statement for 2020. Assume that net working capital will equal 50% of fixed assets.

a2. 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?

Definition Definition Financial statement that provides a snapshot of an organization's financial position at a specific point in time. It summarizes a company's assets, liabilities, and shareholder's equity, detailing what the company owns, what it owes, and what is left over for its owners. The balance sheet serves as a crucial tool to assess the financial health and stability of a company, as well as to help management make informed decisions about its future investments and financial obligations.

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