Question

COMPUTERFIELD CORPORATION has the following financial statements for fiscal year 2017. The firm forecasts 20% sales growth next year and every item will grow accordingly.

Questions:

1. Is this growth feasible without external financing? If not, how much external financing is needed?

2. All conditions same, what growth rate can the firm achieve in 2018 without the external financing you just computed?

In both 1) and 2), assume that firm pays NO dividend.

COMPUTERFIELD CORPORATION
Financial Statements
Income Statement 2017		Balance Sheet 12/31/2017
Sales	$1,000	Assets	$3,000	Debt	$1,500
Costs	800
Taxable income	200			Equity	1500
Taxes (20%)	40
Net income	$160	Total	$3,000	Total	$3,000

Answer 1

Answer 1:

When sales growth is forecasted at 20%, Costs, Assets and current liabilities are expected to grow proportionately.

Sales growth is forecasted at 20%

Hence, for 2018:

Sale = $1,000 *120%=$1,200, Cost = $800 * 120%=$960, Taxable Income = $1,200 - $960 =$240,

Tax = $240 *20% =$48, Net Income =$240 -$48 = $192

Pro forma Income statement for 2018, will be as follows:

For 2018,

Given that there is no dividend payment.

Hence, Retained earnings = Net Income

Equity = $1,500 + $192 =$1,692

Assets = $3,000 * 120% = $3,600

Assuming Debt consists of Current liabilities, forecasted Debt for 2018 = $1,500 *120% =$1,800

As such Total assets = $3,600 and Total Liabilities & Equity = $1,800 + $1,692 =$3,492

As such with 20% forecasted growth rate total assets required are higher than Total Liabilities & Equity and hence this growth is not feasible without external financing.

External Financing required = Assets - Debt - Equity = $3,600 - $1,800 -$1,692 = $108

Answer 2:

Let us assume growth rate that can be achieved with external finance = g

Since there is no dividend payout:

We know that = (Asset - Debt) * (1 + Growth rate) = Equity + Profit (1 + Growth rate)

=(3,000 - 1,500)* (1 +g) = 1,500 + 160 * (1 + g)

=>1,500 +1500g = 1660 + 160g

=>1340g =160

=> g = 11.94%