Question: Pro Forma Analysis and Default Points (Medium) A firm has the following balance sheet and income statement (in millions of dollars):
The long-term debt is 8 percent coupon debt maturing in five years. The statutory tax rate is 38 percent. Prepare proforma financial statements for the next five years under the two following scenarios. Also forecast cash available for debt service and the debt service requirement under both scenarios. The firm pays no dividends.
a. Sales are expected to grow at 4 percent per year, with the current operating profit margin being maintained and with an asset turnover of 1.14.
b. Sales are expected to decline by 4 percent per year and operating profit margins are expected to decline to 2 percent. With some assets inflexible, asset turnovers are expected to decline to 0.98. Does either of these two scenarios forecast default on the debt?