Reference no: EM132719993

Real Enterprises has the following expectations for 2018:

• The expected rate of growth in sales is 20%.
• Real Enterprises expects to lower its cost of goods sold to 60% of sales.
• Operating expenses will remain the same proportion of sales as they were in 2017.
• The company's rate of interest on both short-term and long-term debt is 6%. The firm will retire the current portion of its long-term debt and will keep its credit line at the bank. It will pay interest on the debt from 2017 that is carried forward to 2018, not on new debt.
• The firm is operating at full capacity with respect to its fixed assets. Therefore, any increase in sales will result in a corresponding increase in fixed assets. Depreciation will be 10% of this increase plus an additional $100,000 depreciation on its existing fixed assets.
• Real Enterprises is in a 21% tax bracket and expects to maintain its 35% dividend payout ratio.
• The firm expects all other current assets and current liabilities (including the firm's credit line) to remain at 2017 proportions relative to sales. Use the firm's long-term debt as the plug figure. If there are excess funds, assume that the firm will use them to retire long-term debt.

Problem 1: Pro forma income statement and balance sheet for 2018.