Info

Total assets

$3,750

$750

and owners' equity

$3,750

$750

If we take the need for $565 in new financing as given, we know that Rosengarten has three possible sources: short-term borrowing, long-term borrowing, and new equity. The choice of some combination among these three is up to management; we will illustrate only one of the many possibilities.

Suppose Rosengarten decides to borrow the needed funds. In this case, the firm might choose to borrow some over the short term and some over the long term. For example, current assets increased by $300 whereas current liabilities rose by only $75. Rosengarten could borrow $300 - 75 = $225 in short-term notes payable and leave total net working capital unchanged. With $565 needed, the remaining $565 - 225 = $340 would have to come from long-term debt. Table 4.5 shows the completed pro forma balance sheet for Rosengarten.

We have used a combination of short- and long-term debt as the plug here, but we emphasize that this is just one possible strategy; it is not necessarily the best one by any means. There are many other scenarios we could (and should) investigate. The various ratios we discussed in Chapter 3 come in very handy here. For example, with the scenario we have just examined, we would surely want to examine the current ratio and the total debt ratio to see if we were comfortable with the new projected debt levels.

Now that we have finished our balance sheet, we have all of the projected sources and uses of cash. We could finish off our pro formas by drawing up the projected statement of cash flows along the lines discussed in Chapter 3. We will leave this as an exercise and instead investigate an important alternative scenario.

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