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The most recent financial statements for Crosby, Inc., follow. Interest expense will remain constant; the tax...

The most recent financial statements for Crosby, Inc., follow. Interest expense will remain constant; the tax rate and the dividend payout rate will also remain constant. Costs, other expenses, current assets, fixed assets, and accounts payable increase spontaneously with sales.

CROSBY, INC.
2017 Income Statement
  Sales $ 772,000
  Costs 628,000
  Other expenses 33,500
  Earnings before interest and taxes $ 110,500
  Interest paid 17,600
  Taxable income $ 92,900
  Taxes (24%) 22,296
  Net income $ 70,604
Dividends $ 19,940
Addition to retained earnings 50,664
CROSBY, INC.
Balance Sheet as of December 31, 2017
Assets Liabilities and Owners’ Equity
  Current assets   Current liabilities
    Cash $ 26,140     Accounts payable $ 65,000
    Accounts receivable 35,650     Notes payable 20,300
    Inventory 72,230       Total $ 85,300
      Total $ 134,020   Long-term debt $ 120,000
  Owners’ equity
  Fixed assets     Common stock and paid-in surplus $ 115,000
    Net plant and equipment $ 229,000     Retained earnings 42,720
      Total $ 157,720
  Total assets $ 363,020   Total liabilities and owners’ equity $ 363,020

Complete the pro forma income statements below. (Input all answers as positive values. Do not round intermediate calculations.)

Calculate the EFN for 20, 25 and 30 percent growth rates. (Do not round intermediate calculations. A negative answer should be indicated by a minus sign.)
CROSBY, INC.
2017 Income Statement
  Sales $ 772,000
  Costs 628,000
  Other expenses 33,500
  Earnings before interest and taxes $ 110,500
  Interest paid 17,600
  Taxable income $ 92,900
  Taxes (24%) 22,296
  Net income $ 70,604
Dividends $ 19,940
Addition to retained earnings 50,664
CROSBY, INC.
Balance Sheet as of December 31, 2017
Assets Liabilities and Owners’ Equity
  Current assets   Current liabilities
    Cash $ 26,140     Accounts payable $ 65,000
    Accounts receivable 35,650     Notes payable 20,300
    Inventory 72,230       Total $ 85,300
      Total $ 134,020   Long-term debt $ 120,000
  Owners’ equity
  Fixed assets     Common stock and paid-in surplus $ 115,000
    Net plant and equipment $ 229,000     Retained earnings 42,720
      Total $ 157,720
  Total assets $ 363,020   Total liabilities and owners’ equity $ 363,020

Complete the pro forma income statements below. (Input all answers as positive values. Do not round intermediate calculations.)

Calculate the EFN for 20, 25 and 30 percent growth rates. (Do not round intermediate calculations. A negative answer should be indicated by a minus sign.)

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Expert Solution

Answer (1):

Costs and other expenses, increase spontaneously with sales.

Interest expense will remain constant; the tax rate and the dividend payout rate will also remain constant.

Answer 2:

20% Growth rate:

∆ Sales = 772000 * 20% = $154,400

EFN = (Assets / Sales) * ∆ Sales - (Spontaneous liabilities / Sales) * ∆ Sales - Addition to retained earnings

= 363020 / 772000 * 154400 - 65000 / 772000 * 154400 - 62716

= -$3,112

25% Growth rate:

∆ Sales = 772000 * 25% = $193,000

EFN = (Assets / Sales) * ∆ Sales - (Spontaneous liabilities / Sales) * ∆ Sales - Addition to retained earnings

= 363020 / 772000 * 193000 - 65000 / 772000 * 193000 - 65730

= $8,775

30% Growth rate:

∆ Sales = 772000 * 30% = $231,600

EFN = (Assets / Sales) * ∆ Sales - (Spontaneous liabilities / Sales) * ∆ Sales - Addition to retained earnings

= 363020 / 772000 * 231600 - 65000 / 772000 * 231600 - 68743

= $20,663


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