Amalgamated Enterprises is planning to purchase some new equipment. With this new equipment, the
company expects sales to increase from 8,000,000 to 10,000,000.
A portion of the financing for the purchase of
the equipment will come from a 1,000,000 new common stock issue. The company knows that its current
assets, fixed assets, accounts payable, and accrued expenses increase directly with sales. The company's net
profit margin on sales is 8 percent, and the company plans to pay 40 percent of its after-tax earnings in
dividends. A copy of the company's current balance sheet is given below.
Amalgamated Enterprises Balance Sheet
Current assets 3,000,000
Fixed assets 12,000,000
Total assets 15,000,000
Accounts payable 4,000,000
Accrued expenses 1,000,000
Long-term debt 3,000,000
Common stock 2,000,000
Retained earnings 5,000,000
Total liabilities and net
worth
15,000,000
Prepare a pro forma balance sheet for Amalgamated for next year.
Question 2
Other things the same, the use of debt financing reduces the firm's total tax bill resulting in a higher
total market value.
Indicate whether the statement is true or false
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