Question

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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Answer 1

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