4-8 (Financial forecasting) The balance sheet of the Thompson Trucking Company (TTC) follows:
Thompson Trucking Company
Balance Sheet,
December 31, 2009
($ millions)
Current assets $10 Accounts payable $ 5
Net fixed assets 15 Notes payable 0
Total $25 Bonds payable 10
Common equity 10
Total $25
TTC had sales for the year ended 12/31/09 of $50 million. The firm follows a policy of paying all net earnings out to its common stockholders in cash dividends. Thus, TTC generates no funds from its earnings that can be used to expand its operations. (Assume that depreciation expense is just equal to the cost of replacing worn-out assets.)
a. If TTC anticipates sales of $80 million during the coming year, develop a pro forma balance sheet for the firm for 12/31/10. Assume that current assets vary as a percent of sales, net fixed assets remain unchanged, and accounts payable vary as a percent of sales. Use notes payable as a balancing entry.
b. How much “new” financing will TTC need next year?
c. What limitations does the percent of sales forecast method suffer from? Discuss briefly.
Click here for the solution: The balance sheet of the Thompson Trucking Company (TTC) follows
