Question

In: Finance

The Optical Scam Company has forecast a sales growth of 25 percent for next year. The...

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.)

  
   

Solutions

Expert Solution

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%

jeff jeffy answered 5 months ago
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