Question

The Optical Scam Company has forecast a sales growth of 25 percent for next year. The current financial statements are shown here:

  

Income Statement
Sales			$	32,100,000
Costs				26,512,400
Taxable income			$	5,587,600
Taxes				1,955,660
Net income			$	3,631,940
Dividends	$	1,452,776
Addition to retained earnings		2,179,164

  

Balance Sheet
Assets				Liabilities and Owners' Equity
Current assets	$	7,370,000		Short-term debt	$	7,383,000
				Long-term debt		5,162,750
Fixed assets		18,952,000
				Common stock	$	1,707,250
				Accumulated retained earnings		12,069,000
				Total equity	$	13,776,250
Total assets	$	26,322,000		Total liabilities and equity	$	26,322,000

  

a.	Using the equation from the chapter, calculate the external financing needed for next year. (Do not round intermediate calculations and round your answer to the nearest whole dollar amount, e.g., 32.)

     
    

b-1.	Construct the firm’s pro forma balance sheet for next year. (Do not round intermediate calculations and round your answers to the nearest whole dollar amount, e.g., 32.)

      

b-2.	Calculate external financing needed. (Do not round intermediate calculations and round your answer to the nearest whole dollar amount, e.g., 32.)

  
      

c.	Calculate the sustainable growth rate for the company based on the current financial statements. (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

  
   

Answer 1

Answer (a):

Working:

After tax profit margin = 3631940 / 32100000

Dividend payout = 1452776 / 3631940 = 40%

Sales current year = $32,100,000

Projected Sales =32,100,000 * (1 + 25%) = $40,125,000

∆ Sales = $40,125,000 - 32100000 = $8,025,000

Assets = $26,322,000

EFN = (Assets / Sales) * ∆ Sales - (Spontaneous liabilities / Sales) * ∆ Sales - Projected Sales * After-tax profit margin * (1 - Dividend Payout ratio)

= 26322000 / 32100000 * 8025000 - $0 - 40125000 * 3631940 / 32100000 * (1 - 40%)

= $3,856,545

EFN = $3,856,545

Answer (b 1):

Answer (b 2):

EFN = 32902500 - 29045955 = $3,856,545

EFN = $3,856,545

Answer (c):

Sustainable growth rate = ROE * Retention rate = (3,631,940 / 13,776,250) * (1- 40%)

= 15.82%

Sustainable growth rate = 15.82%