Assumptions. We build pro-forma statement mostly based on the assumptions given in the case. Other assumptions are following. At first, we assume that the tax rate is an average of tax rates for the past three years which is 20.1%. We use this tax rate to calculate the provision for income taxes for following years. Next assumption is that we take Mr. Dadge’s approximation for the initial rate as the interest rate, 11%. Since Mr. Clarkson finished payment to Mr. Holtz in 1995, we assume that only the bank loan to Suburban National Bank and Northrup National Bank are the interest-bearing liabilities for 1996 through 1999. For account payable period, we calculated two numbers, 53.62 days for 1995 and 54.86 for the first quarter of 1996. We used the payable period for 1995 to calculate the accounts payables for the forecasted years because, as mentioned in the case, Mr. Clarkson’s business has some seasonality so that the payable period for the only first quarter of 1996 would not fully reflect for a whole year. We decided not to include 2% discounts for early payment to the suppliers on our income statement because of the payable period. We also assume that Mr. Clarkson issued no new equities and paid no dividends during the forecasted years. Only source of the change in the net worth is the net income for the same period.
New credit line. The new credit line of $750,000 would be sufficient only for 1996 and 1997. The bank loan would exceed the credit line to 858,000 and 1,109,000 for 1998 and 1999, according to our pro forma statement. Without the approval of the bank, Mr. Clarkson would not be able to expand his business at the current growth rate after 1998. With the assumption of sales growth rate of 25%, the external financing required has become double from $493,000 in 1996 to $1,109,000 in 1999. Since the new credit line is fixed at $750,000, Mr. Clarkson would have to find other ways of financing the operation such as issuing new equity.
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