The most recent financial statements for Ramailo Tours Company are shown below: Income Statement for year ended December 31, 2016 : : Sales Rs. 845,000 Costs (657,000) Other expenses (17,500)…

Solution to Question (a): External Financing Needed (EFN) for 2017

Step 1: Project Sales and Related Items for 2017

Given:

• Sales (2016) = Rs. 845,000
• Sales growth (2017) = 20%
• Costs, other expenses, current assets, and accounts payable increase spontaneously with sales.

Projected Sales (2017): $${\text{Sales}}_{2017}=845,000\times 1.20=\text{Rs. 1,014,000}$$

Projected Costs (2017): $${\text{Costs}}_{2017}=657,000\times 1.20=\text{Rs. 788,400}$$

Projected Other Expenses (2017): $${\text{Other Expenses}}_{2017}=17,500\times 1.20=\text{Rs. 21,000}$$

Projected Earnings Before Interest and Taxes (EBIT): $${\text{EBIT}}_{2017}={\text{Sales}}_{2017}-{\text{Costs}}_{2017}-{\text{Other Expenses}}_{2017}$$ $$=1,014,000-788,400-21,000=\text{Rs. 204,600}$$

Step 2: Project Net Income and Retained Earnings

Given:

• Interest expense remains constant = Rs. 12,500
• Tax rate = 35%
• Dividend payout ratio = 30,810 / 102,700 ≈ 30%

Projected Taxable Income (2017): $${\text{Taxable Income}}_{2017}={\text{EBIT}}_{2017}-\text{Interest}=204,600-12,500=\text{Rs. 192,100}$$

Projected Taxes (2017): $${\text{Taxes}}_{2017}=192,100\times 0.35=\text{Rs. 67,235}$$

Projected Net Income (2017): $${\text{Net Income}}_{2017}={\text{Taxable Income}}_{2017}-{\text{Taxes}}_{2017}=192,100-67,235=\text{Rs. 124,865}$$

Projected Dividends (2017): $${\text{Dividends}}_{2017}=124,865\times 0.30=\text{Rs. 37,459.50}$$

Projected Addition to Retained Earnings (2017): $${\text{Addition to Retained Earnings}}_{2017}={\text{Net Income}}_{2017}-{\text{Dividends}}_{2017}=124,865-37,459.50=\text{Rs. 87,405.50}$$

Step 3: Project Current Assets and Accounts Payable

Given:

• Current assets and accounts payable increase spontaneously with sales.

Projected Current Assets (2017): $${\text{Current Assets}}_{2016}=\text{Cash}+\text{Receivables}+\text{Inventory}=23,000+37,000+79,000=\text{Rs. 139,000}$$ $${\text{Current Assets}}_{2017}=139,000\times 1.20=\text{Rs. 166,800}$$

Projected Accounts Payable (2017): $${\text{Accounts Payable}}_{2016}=\text{Rs. 62,000}$$ $${\text{Accounts Payable}}_{2017}=62,000\times 1.20=\text{Rs. 74,400}$$

Step 4: Calculate Additional Funds Needed (AFN)

The formula for AFN is: $$\text{AFN}=\Delta \text{Assets}-\Delta \text{Liabilities}-\text{Addition to Retained Earnings}$$

Change in Assets (ΔAssets): $$\Delta \text{Assets}={\text{Current Assets}}_{2017}-{\text{Current Assets}}_{2016}=166,800-139,000=\text{Rs. 27,800}$$

Change in Liabilities (ΔLiabilities): $$\Delta \text{Liabilities}={\text{Accounts Payable}}_{2017}-{\text{Accounts Payable}}_{2016}=74,400-62,000=\text{Rs. 12,400}$$

Addition to Retained Earnings (from Step 2): $${\text{Addition to Retained Earnings}}_{2017}=\text{Rs. 87,405.50}$$

Final AFN Calculation: $$\text{AFN}=27,800-12,400-87,405.50=\text{-Rs. 72,005.50}$$

Since AFN is negative, the firm does not need external financing—instead, it has excess funds of Rs. 72,005.50 to support growth.

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Solution to Question (b): Pro Forma Balance Sheet for 2017

Step 1: Project Fixed Assets

Since the firm is operating at full capacity, fixed assets must increase to support higher sales. Assume fixed assets grow proportionally with sales (similar to current assets).

$${\text{Fixed Assets}}_{2016}=\text{Rs. 375,000}$$ $${\text{Fixed Assets}}_{2017}=375,000\times 1.20=\text{Rs. 450,000}$$

Step 2: Project Long-Term Debt and Owners' Equity

Since AFN is negative, no new external financing is required. However, we must adjust retained earnings and possibly long-term debt if needed.

Projected Retained Earnings (2017): $${\text{Retained Earnings}}_{2016}=\text{Rs. 193,000}$$ $${\text{Retained Earnings}}_{2017}=193,000+87,405.50=\text{Rs. 280,405.50}$$

Projected Common Stock and Paid-in Surplus: Assuming no new stock issuance: $${\text{Common Stock}}_{2017}=\text{Rs. 100,000}(\text{unchanged})$$

Projected Long-Term Debt: Since AFN is negative, no new long-term debt is needed. However, if we assume debt remains constant (as per the problem statement), then: $${\text{Long-Term Debt}}_{2017}=\text{Rs. 144,000}(\text{unchanged})$$

Step 3: Prepare Pro Forma Balance Sheet

Using the projected values:

Note: There is a slight discrepancy (Rs. 5.50) due to rounding. This can be ignored in practice.

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Final Answer for (a):

The firm does not need external financing—instead, it has excess funds of Rs. 72,005.50 to support the 20% growth in sales.

Final Answer for (b):

The pro forma balance sheet for 2017 is as shown above, with total assets = Rs. 616,800 and total liabilities & equity = Rs. 616,805.50.