Initial Computation

Analyzing Pro Forma Statements for XYZ Company, INC.

An initiative has been proposed by one of the executives to use expansion of the product line in attemp to increase XYZ's sales. . The expansion of the product line will cost $200,000 of capital. This strategic move is expected to generate increase in sales by 20% s each year for the next five years

A Pro Forma finacial statement covering the next five years is neede to present to determine the possibleimpact of this strategic move. The Pro Forma statements will be based on the current year's Balance Sheetand Profit/Loss Statement and are projected for a 10% increase in sales each year for the next five years.

Assumptions:1. Projection of 10% increase in sales each year for the next five year as the result of this product line expansion.2. The product line expansion will cost $200,000 using internal financing.

XYZ Company, INC.Current Financial Statements ($ thousands)

Income StatementBalance Sheet

Net sales$1,747,698Assets$369,525Debt$146,000Costs1,050,270Equity223,525Net income$697,428Total$369,525Total$369,525

XYZ Company expects sales to increase by 20% as a result in expanding product line in the market.Compute for the projected sales, costs, assets, debt and equity.

Projected sales = $1,747,698 x 1.10 = $1,922,467.80Projected costs = $1,050,270 x 1.10 = $1,155,279

Projected assets = $369,525 x 1.10 = $406,477.50Projected Debt = $146,000 x 1.10 = $160,600Projected Equity = $223,525 x 1.10 = $245,877.50

XYZ Company, INC.Pro Forma Income Statement ($ thousands)

Net sales$1,922,467.80Costs1,155,279Net income$767,188.80

XYZ Company, INC.Pro Forma Balance Sheet ($ thousands)

Assets$406,477.50($36,952.50)Debt$160,600($14,600)Equity245877.5($22,352.50)Total$406,477.50($36,952.50)Total$406,477.50($36,952.50)

Analysis:

The balance sheet is now balance because both the sources and use of funds have increased by 10%.The $36,952.50 in new asset is being financed by $22,352.50 from retained earning (internal financing using equity)and $14,600 from new long-term debt (external financing).

However, the equity account does not look right. XYZ's projected net income was $767,188.80. Adding this ammount to the initial equity account balance of $223,525 yields a final equity balanceof $990,713.80 which is an apparent conflict. To solve for this problem, it is important to reconcilethe account. If the firm is not expected to sell or repurchase stock, there are two basic transactions that could take place during the year. One, the firm could generate income that is added to the retained earnings.Second option is that the management could pay a cash dividend , which is subtracted from the retained earnings.

Because the pro forma equity balance is lower than the sum of the initial equity account balance plus XYZ's net income,the forecast assume the firm will pay a dividend. But for this activity, I will choose to add the retained earning in the pro forma balance sheet.

initial equity$223,525plus net income$697,428Total$920,953Pro forma equity = $245,877.50 lower than the initial equity and net incomeCalculation for the payment of cash dividend:

Formula:Dividends = Beginning equity balance + Net income - Ending equity balance

Dividends = $223,525 + $767,188.80 - $245,877.50Dividends = $990,713.80-$245,877.50Dividends = $744,836.30

The net income of $767,188.80 and the constraint that the ending equity balance is $268,230 will make the company to pay $744,836.30 of dividends.

5 year projectionXYZ Company, INC.Five Year Projection on 20% increase in salePro Forma

Year012345Percent Ratio to the Sales 20XX 20x1 20x2 20x3 20x4 20x5Income StatementNet sales100%$1,747,698$2,097,237.60$2,516,685.12$3,020,022.14$3,624,026.57$4,348,831.89Cost of goods sold60.1%$1,050,270$1,260,324$1,512,388.80$1,814,866.56$2,177,839.87$2,613,407.85Gross profit39.9%$697,428$836,913.60$1,004,296.32$1,205,155.58$1,446,186.70$1,735,424.04Selling expense7.2%$125,000$151,001.11$181,201.33$217,441.59$260,929.91$313,115.90Operating expense16.4%$285,850$343,946.97$412,736.36$495,283.63$594,340.36$713,208.43

Operating profit (EBITDA)16.4%$286,578$341,965.53$410,358.63$492,430.36$590,916.43$709,099.72

Other income (expense)1.4%$24,150$29,361.33$35,233.59$42,280.31$50,736.37$60,883.65Pretax profit (EBITDA - Total other Income (Expense)15.0%$262,428$312,604.20$375,125.04$450,150.05$540,180.06$648,216.07Income tax allowance (45%)$118,093$140,671.89$168,806.27$202,567.52$243,081.03$291,697.23Net Profit$144,335$171,932.31$206,318.77$247,582.53$297,099.03$405,135.04

Balance SheetCurrent AssetsCash0.60%$10,525$12,583.43$15,100.11$18,120.13$21,744.16$26,092.99Account Receivable1.54%$27,000$32,297.46$38,756.95$46,508.34$55,810.01$66,972.01Inventory1.72%$30,000$36,072.49$43,286.98$51,944.38$62,333.26$74,799.91Prepaid Expenses0.11%$2,000$2,306.96$2,768.35$3,322.02$3,986.43$4,783.72Total Current Assets$69,525$83,260.33$99,912.40$119,894.88$143,873.85$172,648.63

Fixed AssetsNet Property, Equipment and Vehicle DepreciationFixed$300,000$300,000.00$300,000.00$300,000.00$300,000.00$300,000.00Total Fixed Assets$300,000$300,000.00$300,000.00$300,000.00$300,000.00$300,000.00

Total Assets$369,525$383,260.33$399,912.40$419,894.88$443,873.85$472,648.63

LiabilitiesInventory$30,000Accounts payable0.29%$5,000$6,081.99$7,298.39$8,758.06$10,509.68$12,611.61Revolving line of credit1.14$20,000$23,908.51$20,000.00$20,000.00$20,000.00$20,000.00Current Portion of Long-term Debt0.86%$15,000$18,036.24$21,643.49$25,972.19$31,166.63$37,399.95Total Current Liabilities$40,000$48,026.74$48,941.88$54,730.25$61,676.31$70,011.57

Long-term LiabilitiesLong-term debt and capital leases2.60%$45,500$54,528$65,433.81Loans payable to stockholders3.46%$60,500$72,564.42$87,077.31$60,500.00$60,500.00$60,500.00Total Long-Term Liabilities$106,000$127,092.60$152,511.12

Total Liabilities$146,000$175,119.34$201,453.00

Stockholders EquityCommon stock0.06%$1,000$1,258.34$1,510.01$1,000.00$1,000.00$1,000.00Additional Paid-in Capital1.43%$25,000$29,990.50$25,000.00$25,000.00$25,000.00$25,000.00Retained earnings$197,525$171,932.31$206,318.77Total Stockholders Equity$223,525$203,181.15$232,828.78

Total Liabilities and Stockholders Equity$369,525$378,300.49$434,281.78

Sheet3Balance Sheet

Current Assets

Cash$10,525$12,630.00$15,156.00ERROR:#REF!ERROR:#REF!ERROR:#REF!XYZ Company, INC.Account Receivable$27,000$32,400.00$38,880.00ERROR:#REF!ERROR:#REF!ERROR:#REF!Five Year Projection on 20% increase in saleInventory$30,000$36,000.00$43,200.00ERROR:#REF!ERROR:#REF!ERROR:#REF!Pro FormaPrepaid Expenses$2,000$2,400.00$2,880.00ERROR:#REF!ERROR:#REF!ERROR:#REF!Total Current Assets$69,525$83,430.00$100,116.00ERROR:#REF!ERROR:#REF!ERROR:#REF!Year012345Fixed AssetsPercent Ratio to the Sales 20XX 20x1 20x2 20x3 20x4 20x5Net Property, Equipment and Vehicle DepreciationFixed$300,000$300,000.00$300,000.00$300,000.00$300,000.00$300,000.00Income StatementTotal Fixed Assets$300,000$300,000.00$300,000.00$300,000.00$300,000.00$300,000.00Net sales100%$1,747,698$2,097,237.60$2,516,685.12$3,020,022.14$3,624,026.57$4,348,831.89Cost of goods sold60.1%$1,050,270$1,260,324$1,512,388.80$1,814,866.56$2,177,839.87$2,613,407.85Total Assets$369,525$383,430.00$400,116.00ERROR:#REF!ERROR:#REF!ERROR:#REF!Gross profit39.9%$697,428$836,913.60$1,004,296.32$1,205,155.58$1,446,186.70$1,735,424.04Selling expense7.2%$125,000$151,001.11$181,201.33$217,441.59$260,929.91$313,115.90LiabilitiesOperating expense16.4%$285,850$343,946.97$412,736.36$495,283.63$594,340.36$713,208.43Accounts payable$5,000$6,000.00$7,200.00ERROR:#REF!ERROR:#REF!ERROR:#REF!Revolving line of credit$20,000$24,000.00$28,800.00$20,000.00$20,000.00$20,000.00Operating profit (EBITDA)16.4%$286,578$341,965.53$410,358.63$492,430.36$590,916.43$709,099.72Current Portion of Long-term Debt$15,000$18,000.00$21,600.00ERROR:#REF!ERROR:#REF!ERROR:#REF!Total Current Liabilities$40,000$48,000.00$57,600.00ERROR:#REF!ERROR:#REF!ERROR:#REF!Other income (expense)1.4%$24,150$29,361.33$35,233.59$42,280.31$50,736.37$60,883.65Pretax profit (EBITDA - Total other Income (Expense)15.0%$262,428$312,604.20$375,125.04$450,150.05$540,180.06$648,216.07Long-term LiabilitiesIncome tax allowance (45%)$118,093$140,671.89$168,806.27$202,567.52$243,081.03$291,697.23Long-term debt and capital leases$45,500$54,600$65,520.00Net Profit$144,335$171,932.31$206,318.77$247,582.53$297,099.03$405,135.04Long-term loan (for product expansion)0.0$200,0000.0Loans payable to stockholders$60,500$72,600.00$87,120.00$60,500.00$60,500.00$60,500.00Total Long-Term Liabilities$106,000$127,200.00$152,640.00

Total Liabilities$146,000$175,200.00$210,240.00

Stockholders EquityCommon stockFixed$1,000$1,000$1,000$1,000.00$1,000.00$1,000.00Additional Paid-in Capital$25,000$35,297.69$25,000.00$25,000.00$25,000.00Retained earnings$197,525$171,932.31$206,318.77Total Stockholders Equity$223,525$208,230.00

Total Liabilities and Stockholders Equity$369,525$383,430.00

final attempt

XYZ Company, INC.Five Year Projection on 20% increase in salePro Forma Income Statement

Year012345 20XX 20X1 20X2 20X3 20X4 20X5Income StatementCost of goods sold$1,050,270$1,260,324$1,512,388.80$1,814,866.56$2,177,839.87$2,613,407.85Gross profit$697,428$836,913.60$1,004,296.32$1,205,155.58$1,446,186.70$1,735,424.04Selling expense$125,000$150,000.00$180,000.00$216,000.00$259,200.00$311,040.00Operating expense$285,850$343,020.00$411,624.00$493,948.80$592,738.56$711,286.27

Operating profit (EBITDA)$286,578$343,893.60$412,672.32$495,206.78$594,248.14$713,097.77

Other income (expense)$24,150$28,980.00$34,776.00$41,731.20$50,077.44$60,092.93Pretax profit (EBITDA - Total other Income (Expense)$262,428$314,913.60$377,896.32$453,475.58$544,170.70$653,004.84

Income tax allowance (45%)$118,093$141,711.12$170,053.34$204,064.01$244,876.82$293,852.18Net Profit$144,335$173,202.48$207,842.98$249,411.57$299,293.89$359,152.66

*Through the expanssion of product line in the market, the sales are expected to grow by 20% every year for the next five years.

XYZ Company, INC.Five Year Projection on 20% increase in salePro Forma Balance Sheet

Year

20XX 20X1 20X2 20X3 20X4 20X5Assets

Fixed assetsFixed$300,000$300,000$300,000$300,000$300,000$300,000

Current AssetsCash$10,525$11,578$12,735$14,009$15,410$16,951Inventory$30,000$33,000$36,300$39,930$43,923$48,315Accounts receivable$27,000$29,700$32,670$35,937$39,531$43,484Prepaid Expenses$2,000$2,200$2,420$2,662$2,928$3,221Total Assets$369,525$376,478$384,125$392,538$401,792$411,971

Liabilities and Equity

Current LiabilityAccounts Payables$20,000$22,000$24,200$26,620$29,282$32,210Revolving line of creditFixed$20,000$20,000$20,000$20,000$20,000$20,000Total Current Liability$40,000$42,000$44,200$46,620$49,282$52,210

Long-term LiabilityLoans payable to stockholdersFixed$60,500$60,500$60,500$60,500$60,500$60,500Long-term debt and capital leases$45,500$45,500$45,500$45,500$45,500$45,500Total Long-term Liability$106,000$106,000$106,000$106,000$106,000$106,000

EquityCommon StockFixed$1,000$1,000$1,000$1,000$1,000$1,000Additional Paid -in CapitalAssumed$25,000$25,000$25,000$25,000$25,000$20,307Retained earnings$197,525$158,768.94$174,645.83$192,110.42$211,321.46$232,453.61Reserves0.0$43,709.06$33,279.00$21,807.58$9,1880.0Total Equity$223,525$228,478.00$233,925$239,918$246,510$253,761Total Equity and Liabilities$369,525$376,478.00$384,125$392,538$401,792$411,971

The only items affected by the sale percent change in sale are the current assets and liabilities.XYZ Company, INC.Five Year Projection on 20% increase in salePro Forma Income Statement

Year012345 20XX 20X1 20X2 20X3 20X4 20X5Income StatementSales$1,750,450$1,925,495.0$2,118,044.50$2,329,848.95$2,562,833.85$2,819,117.23 Returns and allowances27523027.23329.923662.9124029.20324432.12352Net Sales$1,747,698$1,922,467.8$2,114,714.58$2,326,186.04$2,558,804.64$2,814,685.11

Cost of goods sold$1,050,270$1,155,297$1,270,826.70$1,397,909.37$1,537,700.31$1,691,470.34Gross profit$697,428$767,170.80$843,887.88$928,276.67$1,021,104.33$1,123,214.77

Selling expense$125,000$137,500.00$151,250.00$166,375.00$183,012.50$201,313.75

Operating expense$285,850$314,435.00$345,878.50$380,466.35$418,512.99$460,364.28

Operating profit (EBITDA)$286,578$315,235.80$346,759.38$381,435.32$419,578.85$461,536.73

Other income (expense)$24,150$26,565.00$29,221.50$32,143.65$35,358.02$38,893.82Pretax profit (EBITDA - Total other Income (Expense)$262,428$288,670.80$317,537.88$349,291.67$384,220.83$422,642.92

Income tax allowance (45%)$118,093$129,901.86$142,892.05$157,181.25$172,899.38$190,189.31Net Profit$144,335$158,768.94$174,645.83$192,110.42$211,321.46$232,453.61

*Through the expanssion of product line in the market, the sales are expected to grow by 10% every year for the next five years.