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 (i.e., assets net of depreciation) by $400,000 per year for the next 5 years, and it forecasts that the ratio of revenues to total assets will remain at 1.50. Annual depreciation is 10% of net fixed assets at the beginning of the year. Fixed costs are expected to remain at $96 and variable costs at 80% 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 20% of total capital. INCOME STATEMENT, 2019(Figures in $ thousands)Revenue $2,760 Fixed costs 96 Variable costs (80% of revenue) 2,208 Depreciation 160 Interest (8% of beginning-of-year debt) 40 Taxable income 256 Taxes (at 40%) 102 Net income $154 Dividends$103 Addition to retained earnings$51 BALANCE SHEET, YEAR-END(Figures in $ thousands) 2019Assets Net working capital$240 Fixed assets 1,600 Total assets$1,840 Liabilities and shareholders’ equity Debt$500 Equity 1,340 Total liabilities and shareholders’ equity$1,840 Required:a1. Produce an income statement for 2020. Assume that net working capital will equal 50% of fixed assets.a2. Produce a balance sheet for 2020. Assume that net working capital will equal 50% 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 2020.c. Assume that the balancing item is debt and that no equity is to be issued, what is the projected debt ratio for 2022? PARTS B AND C TO BE ANSWERED

Solution: a) Income statement and Balance sheet balances: First, we know that fixed assets will be increasing by $400,000 net of depreciation in 2020, bringing fixed assets to $2 million. Assuming that net working capital will equal 50% of Fixed assets, net working capital becomes $1 million. This leaves the firm with total assets of $30,00,000. For the balance sheet to balance, the sum of the total liabilities and shareholders equity must therefore equal to $30,00,000. In order to maintain a book debt ratio of 20% of total capital, debt must be issued to increase the debt outstanding to $600,000 and equity must be issued to increase the equity outstanding to $24,00,000 ($3 million - $0.6 million). Revenue is equal to 1.5 times the total assets, or $45,00,000. Fixed costs remain the same. Variable costs are 80% of revenue or $36,00,000. Depreciation is 10% of net fixed assets at the start of the year, or $200,000. Interest expense is 8% of total outstanding debt, or $48,000 ($600,000 * 0.08) Taxable income is calculated by subtracting fixed costs, variable costs, depreciation, interests expense from revenue, yielding $652,000. Taxes are 40% of taxable income or $260,800 ($652,000 *40%) Net income less taxes or $391,200 (652,000 - $260,800) Two thirds of net income are paid as dividends, equaling dividend of $260,800. Remaining Net income comprises retained earnings of $130,400. b and c) Assume that the balancing item is debt and that no equity is to be issued and the projected debt ratio for 2022: 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 $16,60,000 so that when added to equity of $13,40,000, equals the total assets of $30,00,000. In this case, the debt ratio has increased to 55.33% , 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. Debt ratio = Total Debts outstanding / Total Equity and liabilities = $1,660,000 / $3,000,000 = 55.33%

Answered: The following tables contain financial…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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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 (i.e., assets net of depreciation) by $400,000 per year for the next 5 years, and it forecasts that the ratio of revenues to total assets will remain at 1.50. Annual depreciation is 10% of net fixed assets at the beginning of the year. Fixed costs are expected to remain at $96 and variable costs at 80% 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 20% of total capital.

INCOME STATEMENT, 2019 (Figures in $ thousands)
Revenue			$	2,760
Fixed costs				96
Variable costs (80% of revenue)				2,208
Depreciation				160
Interest (8% of beginning-of-year debt)				40
Taxable income				256
Taxes (at 40%)				102
Net income			$	154
Dividends	$	103
Addition to retained earnings	$	51

BALANCE SHEET, YEAR-END (Figures in $ thousands)
	2019
Assets
Net working capital	$	240
Fixed assets		1,600
Total assets	$	1,840
Liabilities and shareholders’ equity
Debt	$	500
Equity		1,340
Total liabilities and shareholders’ equity	$	1,840

Required:

a1. Produce an income statement for 2020. Assume that net working capital will equal 50% of fixed assets.

a2. Produce a balance sheet for 2020. Assume that net working capital will equal 50% 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 2020.

c. Assume that the balancing item is debt and that no equity is to be issued, what is the projected debt ratio for 2022?

PARTS B AND C TO BE ANSWERED

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