MGT213 Finance 1 Financial Planning and Forecasting Exercise

1. Below are the 2018 balance sheet and income statement of Jai Ho Corporation, a trading company:

Jai Ho Corporation
Balance Sheet
December 31, 2018
(in millions of pesos)
ASSETS
Current Assets
Cash ₱225
Accounts receivable 1,080
Inventories 810
Prepaid expenses 45
Total current assets ₱2,160
Noncurrent assets
Property, plant, and equipment ₱2,000
Less: accumulated depreciation 410
Total noncurrent assets ₱1,590
TOTAL ASSETS ₱3,750

LIABILITIES AND EQUITY

Current liabilities
Accounts payable ₱675
Accrued expenses payable 225
Current portion of long-term debt 200
Total current liabilities ₱1,100
Long-term debt 800
Total liabilities ₱1,900
Stockholders’ equity
Paid in capital ₱750
Additional paid in capital 500
Retained earnings 600
Total stockholders’ equity ₱1,850
TOTAL LIABILITIES AND EQUITY ₱3,750

Exercise adapted from Ybañez, R.C., Ilano A. (2010). Corporate Finance Text & Philippine Cases – Volume 1 2e.
MGT213 Finance 1 Financial Planning and Forecasting Exercise

Jai Ho Corporation
Income Statement
For the Year Ended December 31, 2018
(in millions of pesos)
Sales revenue ₱4,500
Cost of sales 2,925
Gross profit 1,575
Operating expenses 975
Earnings before interest and taxes 600
Interest expense 150
Earnings before taxes ₱450
Income taxes 135
NET INCOME ₱315

Out of the ₱975 million operating expenses in 2018, ₱750 million is fixed.

For 2019, the management expects sales to increase to ₱5 billion. Gabriel Ho, the president of Jai Ho,
wants to see the projected balance sheet and income statement for 2009. He asked his chief financial
officer to prepare these projected financial statements.

The following assumptions are made in the preparation of the projected financial statements:

a. The financial statement method is used.

b. Gross profit margin is reduced to 32.5%
c. Variable operating expenses remains at 5% of sales.
d. Use 20 years for depreciating property, plant, and equipment. There will be no acquisition of new
equipment in 2019.
e. Long-term debt has an interest rate of 15%. ₱200 million in principal balance is paid at the end of
each year.
f. The company has a dividend pay-out ratio of 60% applied on the preceding year’s reported net
income.
g. Use short-term notes payable for external funds needed.
h. Income tax rate is 30%

Requirement:
Prepare the 2019 projected balance sheet and income statement.

2. Use the same 2018 financial statements as in Exercise 1, but use the following assumptions for 2019.

a. Sales will increase to ₱5 billion.

b. Gross profit margin will be increased to 35%.
c. Variable operating expenses will remain at 5% of sales.
d. Fixed operating expenses will remain at ₱750 million.
e. Days’ receivables will be reduced to 80 days. Assume 360 days in a year.
f. Days’ inventories will be reduced to 90 days.

Exercise adapted from Ybañez, R.C., Ilano A. (2010). Corporate Finance Text & Philippine Cases – Volume 1 2e.
MGT213 Finance 1 Financial Planning and Forecasting Exercise

g. The following accounts will vary in direct proportion with sales:

• Cash
• Prepaid expenses
• Accounts payable
• Accrued expense payable
h. Use 20 years for depreciating property, plant, and equipment. There will be no acquisition of new
equipment in 2009.
i. Long-term debt has an interest rate of 15%. ₱200 million in principal balance is paid at the end of
each year.
j. The company has a dividend pay-out ratio of 60% applied on the preceding year’s reported net
income.
k. Use short-term notes payable for external funds needed.
l. Income tax rate is 30%

Requirement:
Prepare the 2019 projected balance sheet and income statement.

Exercise adapted from Ybañez, R.C., Ilano A. (2010). Corporate Finance Text & Philippine Cases – Volume 1 2e.