a. Refer to Wal-Mart financial statements, above. Prepare a forecasted income statement for Year 8 assuming:

• Total revenues are expected to increase by 12% from Year 7 to Year 8.
• Operating income as a percentage of total revenues will remain unchanged from Year 7 to Year 8.
• Total interest costs will increase by 10%.
• Effective tax rate is 37%.

b. What additional information will Wal-Mart need in order to assess whether it needs additional outside funding?

Question

a. Refer to Wal-Mart financial statements, above. Prepare a forecasted income statement for Year 8 assuming:

• Total revenues are expected to increase by 12% from Year 7 to Year 8.
• Operating income as a percentage of total revenues will remain unchanged from Year 7 to Year 8.
• Total interest costs will increase by 10%.
• Effective tax rate is 37%.

b. What additional information will Wal-Mart need in order to assess whether it needs additional outside funding?

Quizplus · Accepted Answer

The Answer is a.

\begin{array}{lr} ext { Sales } & \$ 118,884 \ ext { Operating income } & 6,378 \ ext { Interest expense } & 929 \ ext { Earnings before taxes } & 5,448 \ ext { Taxes } & 2,016 \ ext { Net income } & \$ 3,432\end{array}

b. Wal-Mart will need to determine the amount of extra assets it needs to support growth. This would include:

• increases in inventory.
• increases in accounts receivable.
• increases in fixed assets.
• increases in other assets and desired loan levels.

Offsetting the funds required for increased growth would be the natural increase in accounts payable and other accruals that would occur (operating liabilities).

Additionally, it would need to determine what dividends it wanted to pay.

So additional funds will equal:

Net income - dividends - increase in assets + increase in (operating) liabilities

A Refer to Wal-Mart Financial Statements, Above