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APEC 3501

Fall 2009

S&S Air Case: Question #3


What happens to EFN when assets are purchased in increments of $5 million?
We will assume that the company will go ahead with the fixed asset acquisition. To estimate the new
depreciation charge, we will find the current depreciation as a percentage of fixed assets, then, apply this
percentage to the new fixed assets. The depreciation as a percentage of assets this year was:
Depreciation percentage = $1,366,680 / $16,122,400
Depreciation percentage = .0848 or 8.48%
The new level of fixed assets with the $5 million purchase will be:
New fixed assets = $16,122,400 + 5,000,000 = $21,122,400
So, the pro forma depreciation will be:
Pro forma depreciation = .0848($21,122,400)
Pro forma depreciation = $1,790,525 **
We will use this amount in the pro forma income statement. So, the pro forma income statement will
be:
Income statement
Sales
COGS
Other expenses
Depreciation**
EBIT
Interest
Taxable income
Taxes (40%)
Net income
Dividends
Add to RE

$ 34,159,350
24,891,530
4,331,600
1,790,525
$ 3,145,696
478,240
$ 2,667,456
1,066,982
$ 1,600,473
$

582,955
1,017,519

(over)

The pro forma balance sheet will remain the same except for the fixed asset and equity accounts. The
fixed asset account will increase by $5 million, rather than the growth rate of sales.
Balance sheet
Assets
Current Assets
Cash
Accounts rec.
Inventory
Total CA

493,920
793,408
1,161,574
$ 2,448,902

Liabilities & Equity


Current Liabilities
Accounts Payable
$
Notes Payable
Total CL
$

995,680
2,030,000
3,025,680

Long-term debt

5,320,000

Fixed assets
Net PP&E

$ 21,122,400

Shareholder Equity
Common stock
Retained earnings
Total Equity

Total Assets

$ 23,571,302

Total L&E

350,000
10,737,439
$ 11,087,439

$ 19,433,119

So, the EFN is:


EFN = Total assets Total liabilities and equity
EFN = $23,581,302 19,433,119
EFN = $4,138,184
Since the fixed assets have increased at a faster percentage than sales, the capacity utilization for
next year will decrease.