right-hand side, retained earnings, will vary with sales, but it won't be a simple percentage of sales. Instead, we will explicitly calculate the change in retained earnings based on our projected net income and dividends.

We can now construct a partial pro forma balance sheet for Rosengarten. We do this by using the percentages we have just calculated wherever possible to calculate the projected amounts. For example, net fixed assets are 180 percent of sales; so, with a new sales level of $1,250, the net fixed asset amount will be 1.80 X $1,250 = $2,250, representing an increase of $2,250 - 1,800 = $450 in plant and equipment. It is important to note that for those items that don't vary directly with sales, we initially assume no change and simply write in the original amounts. The result is shown in Table 4.4. Notice that the change in retained earnings is equal to the $110 addition to retained earnings we calculated earlier.

Inspecting our pro forma balance sheet, we notice that assets are projected to increase by $750. However, without additional financing, liabilities and equity will only increase by $185, leaving a shortfall of $750 - 185 = $565. We label this amount external financing needed (EFN).

0 0

Post a comment