In accounting, we know that the income statement provides a record of what led to net income for the year. Just as you might develop a forecast of the future year’s budget, financial professionals forecast future income by developing a one-year forecast of the firm’s income statement, more commonly known as the pro forma income statement. Taken together with assumptions about future assets, liabilities, and retained earnings, one can estimate future long-term financing needs for the corporation.
For this Assignment, complete Problems 17-7 (one year pro forma statement) and 17-8 (forecast of long-term debt financing need) in the attached file.
In addition, provide two or more suggestions on what Ambrose Inc. could do to reduce the forecasted debt financing (the managerial part of financing). Be sure to provide rationales as to why your suggestions will be effective in reducing the forecasted debt financing need.
PRO FORMA INCOME STATEMENT At the end of last year, Roberts Inc. reported the following income statement (in millions of dollars):
| Sales | $3,000 |
| Operating costs excluding depreciation | 2,450 |
| EBITDA | $ 550 |
| Depreciation | 250 |
| EBIT | $ 300 |
| Interest | 125 |
| EBT | $ 175 |
| Taxes (40%) | 70 |
| Net income | $ 105 |
Looking ahead to the following year, the company’s CFO has assembled this information:
- Year-end sales are expected to be 10% higher than the $3 billion in sales generated last year.
- Year-end operating costs, excluding depreciation, are expected to equal 80% of year-end sales.
- Depreciation is expected to increase at the same rate as sales.
- Interest costs are expected to remain unchanged.
- The tax rate is expected to remain at 40%.
On the basis of that information, what will be the forecast for Roberts’ year-end net income?
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