Question

The most recent financial statements for Retro Machine, 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.

RETRO MACHINE, INC. 2016 Income Statement
Sales				$	751,000
Costs					586,000
Other expenses					22,000
Earnings before interest and taxes				$	143,000
Interest paid					18,000
Taxable income				$	125,000
Taxes (30%)					37,500
Net income				$	87,500
Dividends	$	30,000
Addition to retained earnings		57,500

RETRO MACHINE, INC. Balance Sheet as of December 31, 2016
Assets				Liabilities and Owners’ Equity
Current assets				Current liabilities
Cash	$	21,040		Accounts payable	$	55,200
Accounts receivable		33,360		Notes payable		14,400
Inventory		70,320		Total	$	69,600
Total	$	124,720		Long-term debt	$	134,000
				Owners’ equity
Fixed assets				Common stock and paid-in surplus	$	120,000
Net plant and equipment	$	340,000		Accumulated retained earnings		141,120
				Total	$	261,120
Total assets	$	464,720		Total liabilities and owners’ equity	$	464,720

  
Complete the pro forma income statements below. (Do not round intermediate calculations and round your answers to the nearest whole number.)
   

Pro Forma Income Statement
		10% Sales Growth				20% Sales Growth				25% Sales Growth
Sales	$				$				$
Costs
Other expenses
EBIT	$				$				$
Interest
Taxable income	$				$				$
Taxes (30%)
Net income	$				$				$
Dividends	$				$				$
Add to RE

Complete the pro forma balance sheet for each sales growth rate. (Do not round intermediate calculations and round your answers to the nearest whole number.)

10% Sales Growth:
  

Pro Forma Balance Sheet
Assets				Liabilities and Owners’ Equity
Current assets				Current liabilities
Cash	$			Accounts payable	$
Accounts receivable				Notes payable
Inventory				Total	$
Total	$			Long-term debt	$
				Owners’ equity
Fixed assets				Common stock and paid-in surplus	$
Net plant and equipment	$			Accumulated retained earnings
				Total	$
Total assets	$			Total liabilities and owners’ equity	$

20% Sales Growth:

Pro Forma Balance Sheet
Assets				Liabilities and Owners’ Equity
Current assets				Current liabilities
Cash	$			Accounts payable	$
Accounts receivable				Notes payable
Inventory				Total	$
Total	$			Long-term debt	$
				Owners’ equity
Fixed assets				Common stock and paid-in surplus	$
Net plant and equipment	$			Accumulated retained earnings
				Total	$
Total assets	$			Total liabilities and owners’ equity	$

25% Sales Growth:
  

Pro Forma Balance Sheet
Assets				Liabilities and Owners’ Equity
Current assets				Current liabilities
Cash	$			Accounts payable	$
Accounts receivable				Notes payable
Inventory				Total	$
Total	$			Long-term debt	$
				Owners’ equity
Fixed assets				Common stock and paid-in surplus	$
Net plant and equipment	$			Accumulated retained earnings
				Total	$
Total assets	$			Total liabilities and owners’ equity	$

Calculate the EFN for 10, 20, and 25 percent growth rates. (Do not round intermediate calculations and round your answers to the nearest whole number. A negative answer should be indicated by a minus sign.)

	10%			20%			25%
EFN	$			$			$

Answer 1

	Pro Forma Income Statement
			10% Sales Growth				20% Sales Growth				25% Sales Growth
	Sales	$	826100			$	901200			$	938750
	Costs		644600				703200				732500
	Other expenses		24200				26400				26400
	EBIT	$	157300			$	171600			$	179850
	Interest		18000				18000				18000
	Taxable income	$	139300			$	153600			$	161850
	Taxes (30%)		41790				46080				48555
	Net income	$	97510			$	107520			$	113295
	Dividends	$	33432			$	36864			$	38844
	Add to RE		64078				70656				74451
	Dividend Payout Ratio - 30000/87500	34.29%
	Complete the pro forma balance sheet for each sales growth rate
	10% Sales Growth:
	Pro Forma Balance Sheet
	Assets				Liabilities and Owners’ Equity
	Current assets				Current liabilities
	Cash	$	23144		Accounts payable	$	60720
	Accounts receivable		36696		Notes payable		14400
	Inventory		77352		Total	$	75120
	Total	$	137192		Long-term debt	$	134000
					Owners’ equity
	Fixed assets				Common stock and paid-in surplus	$	120000
	Net plant and equipment	$	374000		Accumulated retained earnings		205198	141120+64078
					Total	$	325198
	Total assets	$	511192		Total liabilities and owners’ equity	$	459198
	External Finance Needed		51994	(511192-459198)
	20% Sales Growth:
	Pro Forma Balance Sheet
	Assets				Liabilities and Owners’ Equity
	Current assets				Current liabilities
	Cash	$	25248		Accounts payable	$	66240
	Accounts receivable		40032		Notes payable		14400
	Inventory		84384		Total	$	80640
	Total	$	149664		Long-term debt	$	134000
					Owners’ equity
	Fixed assets				Common stock and paid-in surplus	$	120000
	Net plant and equipment	$	408000		Accumulated retained earnings		211776	141120+70656
					Total	$	331776
	Total assets	$	557664		Total liabilities and owners’ equity	$	465776
	External Finance Needed		91888	(557664-465776)
	25% Sales Growth:
	Pro Forma Balance Sheet
	Assets				Liabilities and Owners’ Equity
	Current assets				Current liabilities
	Cash	$	26300		Accounts payable	$	69000
	Accounts receivable		41700		Notes payable		14400
	Inventory		87900		Total	$	83400
	Total	$	155900		Long-term debt	$	134000
					Owners’ equity
	Fixed assets				Common stock and paid-in surplus	$	120000
	Net plant and equipment	$	425000		Accumulated retained earnings		215571	141120+74451
					Total	$	335571
	Total assets	$	580900		Total liabilities and owners’ equity	$	469571
	External Finance Needed		111329	(580900-469571)
3		10%			20%			25%
	EFN	$	51994		$	91888		$	111329