Question 19.ss.2: Use the financial information for Starlight from Problem 19....
Use the financial information for Starlight from Problem 19.1. Assume now that equity accounts do not vary directly with sales, but change when retained earnings change or new equity is issued. The company pays 45 percent of its income as dividends every year. In addition, the company plans to expand production capacity by building a new facility that will cost $225,000. Th e firm has no plans to issue new equity this year. Any funds that need to be raised will be raised through the sale of long-term debt. Prepare a pro forma balance sheet using this information.
The pro forma income statement is the same as that shown in the solution to Problem 19.1. We now have to account for the payment of dividends. Since the company pays 45 percent of its net income as dividends, the retained earnings for 2012 is calculated as follows:
Retained earnings from 2012 income = $290,882 × (1 − 0.45) = $159,985.
• Th is is the amount by which retained earnings will increase in 2012, from $97,118 to $257,103.
• No new equity is added.
• Th e increase in assets is financed externally through the sale of long-term debt.
The pro forma balance sheet is as follows:
Starlight, Inc. Balance Sheet as of June 30, 2012
| \bold{Assets:} | \bold{Liabilities and Stockholders' Equity:} |
| \begin{matrix} \text{Cash} && \$30,162 \\ \text{Accounts receivables} && 52,510 \\ \text{Inventories} && \underline{200,534} \\ \text{Total current assets} && \$283,206\\ \text{Net fixed assets} && 390,506 \\\text{Addition to fixed assets} && 225,000\\ \text{Other assets} && \underline{15,750} \\ \text{Total assets} && \$ 914,462 \end{matrix} | \begin{matrix} \text{Account payables} && \$81,426 \\ \text{Notes payables} && \underline{43,745} \\ \\ \text{Total current liabilities} && \$125,171 \\ \text{Long-term debt} && 382,188 \\ \text{Common stock} && 150,000 \\ \text{Retained earnings} && \underline{257,103} \\ \quad \quad \quad \quad \quad \text{Total liabilities and equity} && \$914,462 \end{matrix} |