Question

he most recent financial statements for Retro Machine, Inc., follow. Sales for 2021 are projected to grow by 25 percent. 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.

RETRO MACHINE, INC. 2020 Income Statement
Sales				$	767,000
Costs					623,000
Other expenses					31,000
Earnings before interest and taxes				$	113,000
Interest paid					15,600
Taxable income				$	97,400
Taxes (24%)					23,376
Net income				$	74,024
Dividends	$	23,440
Addition to retained earnings		50,584

RETRO MACHINE, INC. Balance Sheet as of December 31, 2020
Assets				Liabilities and Owners’ Equity
Current assets				Current liabilities
Cash	$	25,640		Accounts payable	$	63,000
Accounts receivable		35,100		Notes payable		18,800
Inventory		71,780		Total	$	81,800
Total	$	132,520		Long-term debt	$	115,000
				Owners’ equity
Fixed assets				Common stock and paid-in surplus	$	114,000
Net plant and equipment	$	224,000		Retained earnings		45,720
				Total	$	159,720
Total assets	$	356,520		Total liabilities and owners’ equity	$	356,520

What is the EFN if the firm wishes to keep its debt-equity ratio constant? (Do not round intermediate calculations and round your answer to the nearest whole dollar amount, e.g., 32.)

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Question 12 of 12 Total12 of 12

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Answer 1

Prepare Proforma Income statement for the 25% Growth rate in sales for 2021 as follows
	Sales (767000+767000*25%)	9,58,750
Less:	Costs (623000+623000*25%)	7,78,750
Less:	Other Expenses (31000+31000*25%)	38,750
	EBIT	1,41,250
Less:	Intrest	15,600
	EBT	1,25,650
Less:	Tax @ 24% (EBT*24%)	30,156
	Net Income	95,494
Less:	Dividends (Net Income * 31.665%)	30,239
	Retained Earnings	65,255

Dividend Payout Rate for the year 2020= Dividend / Net Income

= 23440/74024

= 31.665%

Assets	Amount	Liability & Shareholders equity	Amount
Current Assets		Liabilities
Cash	32050	Accounts Payable	78750
Accounts Receivable	43875	Notes Payable	18800
Inventory	89725
		Total	97550
Total	165650	long Term debt	115000
Fixed Assets:
Net Plant and equipment	280000	SHAREHOLDERS EQUITY
		Common Shareholders Equity	114000
		Accumulated retained Earnings	110975
		Total	224975
Total of Assets	445650	Total of Liability & Shareholders equity	437525

Existing Debt equity ratio is constant:

Debt equity ratio = (81800+115000 ) / 159720 = 1.232

Therefore, New Total Debt = 224975 * 1.232 = 277169

New debt of the company should be = 277169

EFN = 277169 - 97550 = $ 179619