Jaffe and Jordan want to use financial planning models to prepare a projected (pro forma) financial statement to determine the profitability and financial health of the business for next year, ending Dec 31, 2021. Use the pro forma financial statement below to answer the following questions:
PRO FORMA INCOME STATEMENT
($millions)
Total operating revenues
82
Less expenses
27
Less depreciation
9
Earnings before interest and taxes
46
Less interest
4
Net income before taxes
42
Less taxes @ 23.8%
10
Net income
32
PRO FORMA BALANCE SHEET
Assets:
Cash
19
Other current assets
28
Net Fixed Assets
40
Total Assets
87
Liabilities and Equities:
Accounts payable
12
Long-term debt
28
Stockholders’ Equity
47
Total Liabilities & Equities
87
a. What is the estimated profit of the business for 2021?
b. Compute the following profitability ratiosand explain to Jaffe and Jordan whether the business looks profitable relative to the performance of the industry.
i. Profit margin
ii. Return on assets
iii. Return on equity
iv. calculate and explain operating cash flow
The industry ratios are as follows:
Industry ratios
Profit margin
32.80%
Return on assets
34.00%
Return on equity
42.50%
c. Assuming you project a 25% increase in operating revenue (sales) per year what will be the anticipated operating revenue in 2022?
d. If net income is projected to increase by 20% per year, what will be the profit margin in 2022?
e. What will be the estimated earnings per share (EPS) in 2022 if 1,000,000 shares are issued?
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