A group of investors is planning to set up a new company. To help determine the new company’s financial requirements, the president has asked you to construct a pro forma balance sheet for 31 December 2019, the end of the first year of operations, and to estimate the company’s external financing requirements for 2019. Sales for 2019 are projected at $25 million, and the following are industry average ratios for similar companies: Sales to common equity (S/E) 5 times Current debt to equity (CL/E) 50% Total debt to equity (D/E) 80% Current ratio (CA/CL) 2.2 times Sales to inventory (S/Inv) 9 times Accounts receivable to sales ((A/R)/S) 10% Fixed assets to equity (FA/E) 70% Profit margin (NIAT/S) 5% Dividend payout ratio (DIV/NIAT) 30% a. Complete the pro forma balance sheet below, assuming that 2019 sales are $25 million and that the firm maintains industry average ratios b. What would be the amount of equity financing that must be supplied by the investors?

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
icon
Related questions
Question
A group of investors is planning to set up a new company. To help determine the new company’s financial requirements, the president has asked you to construct a pro forma balance sheet for 31 December 2019, the end of the first year of operations, and to estimate the company’s external financing requirements for 2019. Sales for 2019 are projected at $25 million, and the following are industry average ratios for similar companies: Sales to common equity (S/E) 5 times Current debt to equity (CL/E) 50% Total debt to equity (D/E) 80% Current ratio (CA/CL) 2.2 times Sales to inventory (S/Inv) 9 times Accounts receivable to sales ((A/R)/S) 10% Fixed assets to equity (FA/E) 70% Profit margin (NIAT/S) 5% Dividend payout ratio (DIV/NIAT) 30% a. Complete the pro forma balance sheet below, assuming that 2019 sales are $25 million and that the firm maintains industry average ratios b. What would be the amount of equity financing that must be supplied by the investors?
Expert Solution
trending now

Trending now

This is a popular solution!

steps

Step by step

Solved in 3 steps with 4 images

Blurred answer
Similar questions
Recommended textbooks for you
FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
Accounting
ISBN:
9781259964947
Author:
Libby
Publisher:
MCG
Accounting
Accounting
Accounting
ISBN:
9781337272094
Author:
WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:
Cengage Learning,
Accounting Information Systems
Accounting Information Systems
Accounting
ISBN:
9781337619202
Author:
Hall, James A.
Publisher:
Cengage Learning,
Horngren's Cost Accounting: A Managerial Emphasis…
Horngren's Cost Accounting: A Managerial Emphasis…
Accounting
ISBN:
9780134475585
Author:
Srikant M. Datar, Madhav V. Rajan
Publisher:
PEARSON
Intermediate Accounting
Intermediate Accounting
Accounting
ISBN:
9781259722660
Author:
J. David Spiceland, Mark W. Nelson, Wayne M Thomas
Publisher:
McGraw-Hill Education
Financial and Managerial Accounting
Financial and Managerial Accounting
Accounting
ISBN:
9781259726705
Author:
John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting Principles
Publisher:
McGraw-Hill Education