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ABC Electronics has sales of $225,000, profit margin of 9%, total assets of $280,000, and total...

ABC Electronics has sales of $225,000, profit margin of 9%, total assets of $280,000, and total equity of $210,000. The firm does not pay any dividends and does not plan to pay any dividends in the future. Currently, the firm is operating at 80% capacity. All costs vary directly with sales. The firm does not want to obtain any additional external equity. At the sustainable rate of growth, what will be the amount of debt on the firm’s pro-forma balance sheet? Will the firm raise new debt or repay debt? How much? Show full work, including current and pro-forma financial statements.

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Expert Solution

Sustainable rate of growth=(Return on Equity)*(Retention Rate)

Retention Rate=100% (No dividend payout)

Profit Margin=9%

Net Income=9%*225000=$20,250

Total Equity=$210,000

Return on Equity=20250/210000=0.096

Sustainable rate of growth=0.096*100%=9.6%

Sales as per Proforma Income Statement =$225000*1.096=$246,600

Profit =9%*246600=$22194

Dividend to be paid=$0

Increase in Retained Earnings=$22194

Total Equity =210000+22194=$232194

Total Assets=$280,000 (Since the firm was working at 80% capacity, there will not be increase in assets for 9.6% increase in sales)

Amount of debt on the firm’s pro-forma balance sheet=280000-232194=$47,806

It will repay debt.Amount to be repaid =$22,194

FINANCIAL STATEMENTS:

INCOME STATEMENT
Current Proforma
A Sales $225,000 $246,600 (225000*1.096)
B=A-C Costs $204,750 $224,406 (204750*1.096)
C=A*9% Profit(9%) $20,250 $22,194
BALANCE SHEET
D Total Assets $280,000 $280,000
E Total Debt $70,000 $47,806
F Total Equity $210,000 $232,194 (210000+22194)
G=E+F=D Total Debt+Equity $280,000 $280,000

jeff jeffy answered 1 year ago
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