Instructions: Using the information provided below, complete the projected financial statements in the following tab in this MS Excel Workbook:
The background paper, Projected Financial Statements and Financing Requirements, provides necessary guidance for this assignment.
Evaluate the reasonableness of the projected financial statements using supplemental ratios you computed in the following workbook tab and the model for sustainable growth and summarize your recommendations to management regarding its stated or implied financing strategy and policies. Limit the length of your response to 125 words.
Managers' assumptions and methods to be used in preparing the projected fiscal year (FY) 20X6 financial statements:
1. Managers separately prepared a projection indicating that FY 20X6 sales will be $108,000,000.
2. Projected FY 20X6 depreciation expense for manufacturing PP&E, based on existing depreciation schedules of PP&E held at FYE 20X5 plus estimated depreciation of planned 20X6 PP&E purchases, is $13,840,000.
3. The average gross margin during the 20X1-20X5 period is used to project FY 20X6 gross profit.
4. Projected FY 20X6 depreciation expense for non-manufacturing PP&E, based on existing depreciation schedules of PP&E held at FYE 20X5, plus estimated depreciation of planned 20X6 PP&E purchases, is $660,000.
5. The average ratio of "all other S&A-to-sales" during the 20X1-20X5 period is used to project FY 20X6 "all other S&A."
6. Projected FY 20X6 R&D expense, $3,650,000, is based on a tentative proposal, developed in connection with the company's long-term strategic plan.
7. The average annual amount of "other operating expense" during the 20X1-20X5 period is used to project the FY 20X6 amount.
8. Projected FY 20X6 interest expense is based on the average interest rate on existing loans, 8.0 percent, and the projected average balance of loans outstanding, $31,250,000.
9. Managers expect the company to incur a loss on disposal of existing PP&E of about $80,000, based on a tentative capital budget for 20X6.
10. The projected combined effective income tax rate in FY 20X6 is 0.40 (40.0 percent).
11. The projected FY 20X6 balance of cash and cash equivalents is determined according to the method described in the background paper. The company's working capital management policy requires managers to maintain a balance of cash and cash equivalents between $500,000 and $750,000.
12. The average collection period during the 20X1-20X5 period, 45 days, is used to project the FY 20X6 balance of accounts receivable (AR).
13. The average days to sell inventory ratio during the 20X1-20X5 period, 60 days, is used to project the FY 20X6 balance of inventory.
14. The projected FY 20X6 balance of total current assets is determined according to the method described in the background paper.
15. The company's working capital management policy requires managers to maintain a current (working capital) ratio of about 1.0.
16. The projected 20X6 balance of property, plant, and equipment (PP&E) is determined using projected net acquisitions of $12,960,000, obtained from a tentative capital budget.
17. The projected 20X6 balance of accumulated depreciation (AD) is determined using projected depreciation expense of manufacturing and non-manufacturing PP&E and AD of PP&E management tentatively expects to dispose of in 20X6, $5,540,000.
18. The average balance of other assets during the 20X1-20X5 period is a reasonable basis for projecting the 20X6 balance.
19. The projected 20X6 balance of total assets is determined according to the method described in the background paper.
20. The average payment period of "cash costs" during the 20X1-20X5 period, 40 days, is used to project the FY 20X6 balance of accounts payable (AP). "Cash costs" is defined in the background paper.
21. The projected FY 20X6 balance of accrued income taxes payable is determined using the projected provision for income taxes and the average ratio of accrued income taxes payable-to-provision for income taxes during the 20X1-20X5 period, 0.25.
22. The projected FY 20X6 balance of dividends payable is equal to dividends that the company expects to declare during the final week of 20X6, based on net income for that year, and pay early in FY 20X7. The company's long-standing payout ratio (dividend policy) is 0.40 (40 percent).
23. The projected FY 20X6 balance of bank notes payable - current portion is $15,171,000, which is consistent with a current (working capital) ratio of about 1.0, as the company's working capital management policy requires.
24. The projected FY 20X6 balance of accrued interest payable is based on projected annual interest expense and the terms of loan agreements, which require the company to pay interest (accrued using a 360-day year) quarterly, at the beginning of each fiscal quarter.
25. The projected FY 20X6 balance of bank notes payable - noncurrent is determined according to the method described in the background paper.
26. The projected FY 20X6 balance of total liabilities (i.e., targeted total liabilities) is determined according to the method described in the background paper.
27. Management has made no plan to issue (or repuchase) shares of the company's common stock during FY 20X6.
28. The projected FY 20X6 balance of retained earnings (RE) is determined using projected 20X6 net income and projected dividends to be declared based on projected net income (according to the company's dividend policy, indicatedm above).
29. The projected FY 20X6 balance of total liabilities and stockholders' equity is determined according to the method described in the background paper. The targeted total debt ratio is 1.20.
30. Projected FY 20X6 net acquisitions (disposals or maturities) of investment securities and other assets are computed using the projected and FY 20X5 balance sheets.
31. Projected FY 20X6 net acquisitions of PP&E is computed as:
Projected FY 20X6 balance of net PP&E
Add projected FY 20X6 depreciation of manufacturing PP&E
Add projected FY 20X6 depreciation of non-manufacturing PP&E
Add projected FY 20X6 loss (or deduct projected FY 20X6 gain) on disposal of PPE
Less beginning-of-year balance of net PP&E
32. Projected FY 20X6 payment of dividends on common stock is based on dividends declared during the final week of the preceding FY.
Attachment:- Assignments.rar