Question

Mansfield Corporation had 20X1 sales of \(100 million. The balance sheet items that vary directly with sales and the profit margin are as follows:

	Percent
Cash	5%
Accounts receivable	15
Inventory	20
Net fixed assets	40
Accounts payable	15
Accruals	10
Profit margin after tax	10%

The dividend payout rate is 50 percent of earnings, and the balance in retained earnings at the end of 20X1 was \)33 million. Notes payable are currently \(7 million. Long-term bonds and common stock are constant at \)5 million and $10 million, respectively.

c. Prepare a pro forma balance sheet for 20X2 assuming that any external funds being acquired will be in the form of notes payable. Disregard the information in part b in answering this question (that is, use the original information and part a in constructing your pro forma balance sheet).

Short answer

The balance sheet total of the Mansfield corporation is $92 million.

Step-by-step solution

Retained earnings

$\begin{array}{rcl}\mathrm{Retained}\mathrm{earnings}& =& \mathrm{Retained}\mathrm{earnings}\mathrm{of}20\mathrm{X}1+\left(\left(\mathrm{Profit}\mathrm{margin}\times \mathrm{New}\mathrm{sales}\mathrm{level}\right)\left(1-\mathrm{Debt}\mathrm{payout}\mathrm{ratio}\right)\right)\\ & =& \$33\mathrm{million}+\left(\left(0.10\times 115\right)\left(1-0.50\right)\right)\\ & =& \$38.75\mathrm{million}\end{array}$

New sales level

$\begin{array}{rcl}\mathrm{New}\mathrm{sales}\mathrm{level}& =& \mathrm{Existing}\mathrm{sales}+\mathrm{Increase}\mathrm{in}\mathrm{sales}\\ & =& \$100\mathrm{million}+\left(\$100\mathrm{million}\times 15\%\right)\\ & =& \$115\mathrm{million}\end{array}$

Pro forma balance sheet for 20X2

Balance sheet (in $ millions)
Cash (5% of new sales)	$5.75	Accounts payable (15% of new sales)	$17.25
Accounts receivable (15% of new sales)	17.25	Accruals (10% of new sales)	11.50
Inventory (20% of new sales)	23	Notes payable ($7+$2.50)	9.50
Net fixed assets (40% of new sales)	46	Long term bonds	5
		Common stock	10
		Retained earnings	38.75
	$92		$92