t seems to us that Butler has a decision to make. The problem appears to be whether to accept a new relationship or to stay with the present bank under the current borrowing limit. In order to know which solution is better we are going to create a pro-forma balance sheet and an income statement. We are going to look into purchases and calculate the amount, which represents his ten-day spending on purchases. We are going to assume that he lowers his accounts payable to that amount. In order to forecast some of the figures we attached the common size balance sheet and income statement. The sales amount for the year of 1991 are going to be assumed at 3,600,000 while relying on banks estimate.
While projecting the income statement we assumed that the interest for the year 1990 would be comprised of the new loan interest (assume they need the whole amount) at 10.5%. Which is 49,000. Also additional interest we would have to take into consideration is the 11% off of the remaining part of long-term debt, which, as of the end of 1990, equals 50,000. That gives us the interest of off the LTD of 5,500 combined with new loan interest of 49,000 for a total of 54,500.
Largely due to his increased sales our forecast shows that under the same cost assumptions for operating expense and COGS, as well as same levels of ending inventory in relation to sales, Mr. Butler will have a profit of about 46,000 after taxes.
Before we got to forecast a balance sheet we decided to calculate a debt structure under some new assumptions. First Mr. Butler needs to bring his accounts payable closer to reality, as we specified before to a level equal to 10 days of purchases. This would amount to (2,721 est. purch. / 365 days)*10days = 74,540. That meant a reduction from 243,000 (early 1991 le ...