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CASE 11: Ashley Palmer Clothing, Inc. Financial Forecasting Ashley Palmer Clothing, Inc., produces dresses for women.

5. The firm’s tax rate should be about 40 percent. To meet the firm’s financing needs, Palmer has negotiated a line of credit (short-term debt) with Amway Bank for up to $100,000. The bank has also agreed to loan the firm $150,000 for purchasing new equipment; this is to be repaid over five years. The principal on the latter loan is to be repaid in $30,000 annual payments, with interest payments being made on the remaining balance of the note. Both notes will carry a 5 percent interest rate. The short-term notes payable and long-term debt owed in 2013 will be reduced by $50,000 and $30,000, respectively. Accounts payable and other current liabilities should increase proportionally with sales increases. Finally, Jantz and Palmer are willing to provide more of their own money in the form of equity up to a total of $100,000 in equity if needed. They will also lower the amount of dividends they have been paying themselves (about 40 percent of earnings over the past two years). They both have decided to limit their dividends individually to $15,000, or a total of $30,000. Questions1.Given the assumptions that Jantz and Palmer have made, prepare a pro forma income statement and balance sheet for 2014. Assume that the line of credit provided by the bank will be needed for the full year.2.Using the financial ratios presented in Chapter 10, compare Ashley Palmer’s ratios over time, including the pro forma ratios for 2014. If the bank requires a current ratio of at least 1.5 and a debt ratio not to exceed 55 percent, can the owners expect to be able to honor these covenants?3.Prepare a statement of cash flows for 2013 and the 2014 projections. What did you learn from these statements?

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