Amalgamated Enterprises is planning to purchase some new equipment. With this new equipment, the
company expects sales to increase from $8,000,000 to $10,000,000.
A portion of the financing for the purchase of
the equipment will come from a $1,000,000 new common stock issue. The company knows that its current
assets, fixed assets, accounts payable, and accrued expenses increase directly with sales. The company's net
profit margin on sales is 8 percent, and the company plans to pay 40 percent of its after-tax earnings in
dividends. A copy of the company's current balance sheet is given below.
Amalgamated Enterprises Balance Sheet
Current assets $3,000,000
Fixed assets 12,000,000
Total assets $15,000,000
Accounts payable $4,000,000
Accrued expenses 1,000,000
Long-term debt 3,000,000
Common stock 2,000,000
Retained earnings 5,000,000
Total liabilities and net
worth
$15,000,000
Prepare a pro forma balance sheet for Amalgamated for next year.
Amalgamated Enterprises
Pro Forma Balance Sheet
Present Level
(Mil)
Percent of
Sales
Projected Based on
Sales of $10 Mil
Current assets $3 0.375 $3.75
Fixed assets 12 1.500 15.00
Total assets $15 $18.75
Accounts payable $4 0.50 $5.00
Accrued expenses 1 0.125 1.25
Long-term debt 3 a. 4.02d
Common stock 2 a. 3.00b
Retained earnings 5 a. 5.48c
Total liabilities and net worth $15 $18.75
Notes:
a. Not applicable. These accounts are assumed not to vary directly with sales.
b. The company issued $1M in new common stock.
c. The increase in retained earnings is equal to net profit minus dividends paid.
Increase in retained earnings = (.08)($10M)(1-.
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