Producing a set of financial statements


Task: Building Financial Models.

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 (that is, assets net of depreciation) by $200,000 per year for the next 5 years and forecasts that the ratio of revenues to total assets will remain at 1.50. Annual depreciation is 10 percent of net fixed assets at the end of the year. Fixed costs are expected to remain at $56,000 and variable costs at 80 percent of revenue. The company's policy is to pay out two-thirds of net income as dividends and to maintain a book debt ratio of 25 percent of total capital.

1) Produce a set of financial statements for 2007. Assume that net working capital will equal 50 percent of fixed assets.

2) Now assume that the balancing item is debt and that no equity is to be issued. Prepare a completed pro forma balance sheet for 2007. What is the projected debt ratio for 2007?

Income Statement, 2006
(figures in thousands of dollars)
Revenue $1,800
Fixed costs 56
Variable costs (80% of revenue) 1,440
Depreciation 80
Interest (8% of beginning-of-year debt) 24
Taxable income 200
Taxes (at 40%) 80
Net income $ 120
Dividends $80
Retained earnings $40

Balance Sheet, Year-End
(figures in thousands of dollars)2006
Assets
Net working capital $ 400
Fixed assets 800
Total assets $ 1,200
Liabilities and shareholders' equity
Debt $ 300
Equity 900
Total liabilities and
shareholders' equity $ 1,200

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Finance Basics: Producing a set of financial statements
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