Question

GEL Company reports the following summary financial data in its 2019 report. Currently, the financial manager is preparing the forecasted financial statements for 2021. The purpose of the forecasted financial statements is to predict whether the company requires additional funds in 2021 in order to meet its target growth. The company is currently operating at 80% capacity. The following data are used in the forecast. All values are in million.

Last year's sales

$800

Last year's accounts payable

$100

Sales growth rate

20%

Last year's notes payable

$96

Last year's total assets

$1200

Last year's accruals

$240

Last year's profit margin

15%

Target payout ratio

50%

Required?

Calculate the additional funds required in 2021 (4 pts)
How much additional finance will be required for 2021, if the company revised the plan and payout ratio is reduced to 30%? (3 pts)
Compute the self-supporting growth rate of the company (2 pts)

Answer 1

1. Calculation of Additional Funds Required in 2021

Additional Funds Needed = Increase in Assets - Increase in Liabilities - Increase in Retained Earnings

Increase in Assets = Total assets x Sales growth rate = $1200 x 20%

Increase in Assets = $240 million

Increase in Liabilities = Total liabilities x Sales growth rate = $436 x 20%

Increase in Liabilities = $87 million

[Total liabilities include accounts payable, notes payable and accruals. Hence total liabilities = 100 + 96 + 240 = $436 million]

Increase in Retained Earnings = Sales x (1+ sales growth rate) x Profit margin x Retention rate

= 800 x (1 + 20%) x 15% x 50%

= 800 x 1.2 x 0.15 x 0.5

Increase in Retained Earnings = $72 million

Additional Funds Needed = $240 million - $87 million - $72 million

Additional Funds Needed in 2021 = $81 million

2. If the pay out ratio is revised to 30%

Increase in Retained Earnings = 800 x (1 + 20%) x 15% x 30%

= 800 x 1.2 x 0.15 x 0.3 = $43 million

Additional Funds Needed = $240 million - $87 million - $43 million

Additional Funds required for 2021 = $110 million

3. Self- Supporting Growth Rate of the company

Self- Supporting Growth = [M (1 - POR) S₀] / A₀ - L₀ - M (1 - POR) S₀

Where, M = Net Sales = 20%

POR = Pay out ratio = 50%

S₀ = Sales = $800 million

A₀ = Assets = $1200 million

L₀ = Liabilities = $436 million

Growth = [ 20% (1 - 50%) 800] / [1200 - 436 - 20% (1 - 50%) 800]

= [0.2 (1 - 0.5) 800] / [1200 - 436 - 0.2 (1 - 0.5) 800]

= [0.2 (0.5) 800] / [1200 - 436 - 0.2 (0.5) 800]

=80 / 684

Self- Supporting Growth Rate = 11.69%