It is early in 2020. Samantha Stevens has asked you to project the financial statements for her engineering components business for the next two years. She anticipates significant growth ahead withexpected 20% compound growth in sales, although she is concerned that under a pessimistic scenario they would only grow at a compounded rate of 5%. She is interested in knowing whether she will require additional financing for her business. See appendix 1 that has financial statements for the years ended December 31, 2019. You are provided with some additional information:
1) Samantha anticipates that gross margins and working capital “days” will remain the same going forward.
2) Samantha considers SG&A expense to be fixed, and anticipates that the amount will rise by $200K each year.
3) Samantha anticipates spending $800K in fixed assets in 2020 and $900K in fixed assets in 2021. These assets have an estimated useful life of 10 years. Depreciation expense relating to existing fixed assets is expected to be $400K a year in both 2020 and 2021.
4) The company has a term loan outstanding that it took out at the beginning of 2019 for $5M. Principal on the loan is payable in 10 equal annual instalments on Jan 1. Interest expense for 2019 of 9% was paid at the end of 2019.
5) The company’s tax rate is 25%.
Prepare the 2020 and 2021 projected financial statements. How profitable will the company be and much financing will Samantha require?