Part 1.

Financial Planning (30 points)

It is January 1, 2016, and you are tasked with constructing a financial plan for 2016 for ABC
Corp.

The Market Research staff has prepared a sales forecast for the coming year, and expects sales
revenue to grow 20% year over year. With that as a starting point, you will complete the
financial plan relying, in part, upon certain historical patterns as a guide to the future. However,
these historical patterns will be adjusted for certain policy changes that the company plans to put
in place.

ABC Corp is planning to invest $2.4 million in machinery that will reduce warehouse personnel
and reduce ABC Corp’s inventory levels. The reduction in warehouse staff will reduce Cost of
Goods sold by 5% as a percentage of sales revenue in 2016. The days of inventory that ABC
Corp will need to maintain to support sales will be cut in half from the 2015 levels. The $2.4
million in machinery will be depreciated using the straight-line method over the next 12 years,
and the resulting incremental depreciation expense will be added to the 2015 depreciation
expense to determine 2016 depreciation expense.

To reduce ABC Corp’s investment in working capital, it is planning to offer a 1% discount to

customers who pay within 10 days of their purchase. All of ABC Corp’s customers pay with
credit. Management estimates that 50% of its customers (comprising 50% of its sales revenue)
will pay within 10 days, while the payment behavior of the remaining 50% of its customers will
remain unchanged from 2015. The cost of this discount is not included in the revenue forecast
provided by the marketing department and should be calculated as a separate line item on the
2016 pro forma income statement. ABC Corp’s sales will be recorded to accounts receivable
without taking the discount into account.1

As in the past, ABC plans to maintain at least 10% of sales revenue in its cash account and will
continue to pay as it has in the past on its cost of goods sold and general, selling and
administrative expenses. General, selling, and administrative expenses will be the same
percentage of sales in 2016 as in 2015.

Certain other factors are expected to be unchanged from 2015 to 2016. In particular, the
company’s income tax rate is expected to be unchanged, its policy of paying out 20% of earnings
as dividends is expected to be unchanged, and the rate of interest of 8% on long-term debt is
expected to be unchanged. ABC pays interest based on the end of the previous year’s notes
payable.

a. (25 points) ABC Corp will finance any cash shortfalls by securing notes from the bank and
will increase its cash account in the event of a cash surplus. Complete the pro forma income
statement and balance sheet for ABC Corp for 2016.

1
In other words, when calculating accounts receivable for 2016, just use sales revenue. The cost of the discount
should not have any effect on accounts receivable other than how it affects customers’ payment behavior.
 -2-

Exhibit 1

ABC Corp.

Income Statement
(all numbers in thousands)

2015 2016
Gross sales $ 10,000.0 $ 12,000
Cost of goods sold (7,500.0) (8,400)
Sales Discounts Given 0.0 (60)
Gross profit 2,500.0 3,540
General, selling & administrative
expense (1,500.0) (1,800)

Depreciation expense (250.0) _(450)

Earnings before interest & taxes 750.0 1,290
Interest expense (250) (280.5)
Earnings before taxes 500.0 1,009.5
Income taxes (200.0) _(403.8)
Earnings after taxes $ 300.0 605.7

Dividends $ 60.0 121.1

 -3-

!"#$% = 10,000 ∗ 1 + 0.2 = 12,000

7,500
!"#$ = 12,000 − 0.05 = 8,400
10,000

!"#$%&'( = 12,000 ∗ 0.01 ∗ 0.5 = 60

1,500
!"# = 12,000 = 1,800
10,000

2,400
!"#$"%&'(&)* = 250 + = 450
12

!"#$%$&#!!"#$%&$ = 0.08 ∗ 3,506.8 = 280.5

!"#$%$&'!!"#$%"!!"#$% = 12,000 − 8,400 − 60 − 1800 − 450 − 280.5 = 1,009.5

200
!"#$% = 1,009.5 ∗ = 403.8
500

!"#$%$&'!!"#$%!!"# = 1,009.5 − 403.8 = 605.7

60
!"#"$%&$' = 605.7 ∗ = 121.1
300

!"#$%&!!"!!"!!!"!!"#$%&"'!!"#$%$&' = 605.7 − 121.1 = 484.6

 -4-

Exhibit 2

ABC Corp

Balance Sheet (all numbers in thousands)

December 31, 2015 December 31, 2016 Pro Forma

Cash & marketable securities $1,000.0 $ 1,200

Accounts receivable 1,643.8 1,150.7
Inventory 1,849.3 1,035.6
Total current assets $8,493.1
Gross property, plant & equipment 12,000 14,400
Accumulated depreciation -8,000 -8,450
Net property, plant & equipment 4,000 4,000.0 5,950
Total assets $8,493.1 $ 9,336.3

Accounts payable $739.7 838.4

Note payable - bank 3,506.9 3,766.7
Common stock 1,500.0 1,500
Retained earnings 2,746.6 3,231.2
Total liabilities & owners’ equity $8,493.1 $ 9,336.3
 -5-

!"#$%&"'!!"#$%$&' = 484.6 + 2,746.6 = 3,231.2

1,643.8
!"#$!!"#"$%&'(") = 0.5 ∗ 10 + 0.5 ∗ = 35
10,000
365

1,849.3
!"#$!!"!!"#$"%&'( = 0.5 ∗ = 45
7,500
365

739.7
!"#$!!"#"$%&' = = 30
7,500 + 1,500
365

12,000
!""#$%&'!!"#"$%&'(" = ∗ 35 = 1,150.7
365

8,400
!"#$"%&'( = ∗ 45 = 1,035.6
365

8,400 + 1,800
!""#$%&'!!"#"$%& = ∗ 30 = 838.4
365

!"#$$!!!&! = 12,000 + 2,400 = 14,400

!""#$#%&'()!!"#$"%&'(&)* = 8,000 + 450 = 8,450

We know that cash will be at least 0.1*12,000 = 1,200. Note payable will be at least 3,506.8. Use the
accounting identity, Total Assets = Total Liabilities + Total Equity to determine whether cash or the note will
be the plug.

!!"ℎ + 1,150.7 + 1,035.6 + 5,950 = !"#$ + 838.4 + 1,500 + 3,231.2

!!"ℎ + 8,136.3 = !"#$ + 5,569.6

Plug 1,200 in for cash to see whether the Note increases or decreases.

1,200 + 8,136.3 − 5,569.6! = !"#$ = 3,766.7

3,766.7 is greater than the 3,506.8 note from 2015, so Note must be the plug, and it will be 3,766.7.