Blowboney Enterprises Generating Financial Projections
BlowBoney Enterprises is a local technology company. The business has been successful, and it plans to expand. Consequently, they are interested in generating financial projections for the next 3 years. Their current financial information is highlighted below, and it is also reproduced in the downloadable excel template.
Note that the current year balance sheet is not necessarily consistent with the assumptions used to make pro forma projections of the future. You shouldn’t change anything in the current year information to match the assumptions about the future; the current information is to be used as given.
Income Statement Current Sales $2,400,000 Cost of Sales $1,400,000 Gross Margin $1,000,000 SG&A Expense $200,000 Depreciation Expense $125,000 Interest Expense $37,500 Interest Earned $12,500 Profit Before Tax $650,000 Taxes $227,500 Net Income $422,500 Dividends $0 Retained Earnings $422,500
Balance Sheet Current Current Assets Cash $800,000 Accounts Receivable $640,000 Inventory $56,250 Marketable Securities $475,000 Fixed Assets Gross Fixed Assets $2,362,500 Accumulated Depreciation $750,000 Net Fixed Assets $1,612,500 Total Assets $3,583,750 Current Liabilities Accounts Payable $937,500 Other Current Liabilities $118,750 Long-Term Debt $765,000 Stock Holder’s Equity Common Stock $1,500,000 Accumulated Retained Earnings $262,500 Total Liabilities & Equity $3,583,750
The current year balance sheet is not necessarily consistent with the assumptions we use to make the pro forma projections into the future. Do not “correct” anything in the current year information; the current information is to be used as given.
Assume that the proportions of cost of sales, SGA expenses, accounts receivable, inventory, net fixed assets, accounts payable and other current liabilities remain the same proportion of sales for the next 3 years as they were in the current year. You may assume that the level of common stock is constant (not a proportion of sales). You may assume that depreciation expense is a constant proportion of gross fixed assets.
Assume that borrowing additional funds comes at an interest rate of 5.75% and that marketable securities earn 4.25% interest. Assume that the firm maintains a constant level of $800,000 cash. Assume the firm does not pay dividends. Taxes are expected to remain at 35%. Assume that in the projection years, the firm uses either debt or marketable securities, but the two accounts would never both have positive values in the same year. Assume the firm doesn’t carry forward debt or marketable securities principal from year to year. Instead, the firm refinances (or adjusts) these levels every year.
Prepare a preliminary pro forma projection for BlowBoney for the next 3 years. Assume that sales grow at 20% per year.
What is the level of long-term debt projected for BlowBoney at the end of the 3 years? What is the interest earned by BlowBoney at year 3?
Suppose creditors protest due to the high level of accounts payable. Further, your CFO points out that the level of accounts receivable aren’t optimal.
What are the current levels of accounts receivable and accounts payable as a percentage of sales?
If the firm cuts the level of accounts payable (beginning in the first projected year) to exactly 10% of sales, and the level of accounts receivable to exactly 15% of sales, what is the level of long-term debt, if any, at the end of year 3?
Suppose investors in the firm insist on being paid significant dividends. If the firm wishes to begin paying a dividend (60% of net income) next year (first projected year), and if the firm wishes to have accounts payable at exactly 10% of sales, and have accounts receivable at exactly 15% of sales, what is the maximum constant rate at which the firm can grow and not exceed a debt/equity ratio of 35% in year 3?