The following tables
contain financial statements for Dynastatics Corporation:

INCOME STATEMENT, 2000
(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)
                     1999  2000
Assets
Net working capital $ 400 $ 400
Fixed assets          800   800
Total assets       $1,200 $1,200

Liabilities and shareholders' equity

Debt                $ 300 $ 300
Equity                900 900
Total liabilities and
shareholders' equity $1,200 $1,200

221
Although the company has not been growing, it now
Fundamentals of Corporate Finance
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 start 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.
a. Produce a set of financial statements for 2001.
Assume that net working capital will equal 50
percent of fixed assets.
b. Now assume that the balancing item is debt, and
that no equity is to be issued. Prepare a completed
pro forma balance sheet for 2001. What is the
projected debt ratio for 2001?

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Clarification of Question by nockmdead-ga on 10 Nov 2004 07:46 PST

I'm studying for a test coming up next week.  Any chance I could get
this answered by Nov. 17?

a. First, we know that fixed assets will be increasing by $200,000 net
of depreciation in 2001, bringing fixed assets to $1 million. 
Assuming that net working capital will equal 50% of fixed assets, net
working capital becomes $500,000.  This leaves the firm with total
assets of $1,500,000.

For the balance sheet to balance, the sum of the total liabilities and
shareholders' equity must therefore equal $1,500,000.  In order to
maintain a book debt ratio of 25% of total capital, debt must be
issued to increase the debt outstanding to $375,000 and equity must be
issued to increase the equity outstanding to $1,125,000.

Revenue is equal to 1.5 times the total assets, or $2,250,000.

Fixed costs remain the same.

Variable costs are 80% of revenue or $1,800,000.

Depreciation is 10% of net fixed assets at the start of the year, or $100,000.

Interest expense is 8% of the total outstanding debt, or $30,000.

Taxable income is calculated by subtracting fixed costs, variable
costs, depreciation, industries expense from revenue, yielding
$264,000.

Taxes are 40% of taxable income, or $105,600.

Net income equals taxable income less taxes, or $158,400.

Two thirds of net income are paid as dividends, equaling dividends of $105,600.

Remaining net income comprises retained earnings of $52,800.

b.  If the balance sheet is to be balanced with debt with no change to
the amount of equity outstanding, then debt outstanding must be
increased to $600,000 so that it, when added to equity of $900,000,
equals the total assets of $1,500,000.

In this case, the debt ratio has increased to 40%, which is calculated
by dividing the debt outstanding by the total liabilities and
shareholders' equity of the firm.  Interest expense would, of course,
rise, leading to a decrease in taxable income, taxes, net income,
dividends, and retained earnings.

Sincerely,

Wonko

Thank you!  Thank you!  Thank you!  The answer was very clear:  each
step was explained.  By any chance, do you know of any templates that
I could use to create financial statements?