Question

The Optical Scam Company has forecast a sales growth rate of 25 percent for next year. Current assets, fixed assets, and short-term debt are proportional to sales. The current financial statements are shown here:
  

INCOME STATEMENT
Sales			$	31,000,000
Costs				26,367,600
Taxable income			$	4,632,400
Taxes				1,621,340
Net income			$	3,011,060
Dividends	$	1,204,424
Addition to retained earnings		1,806,636

  

BALANCE SHEET
Assets				Liabilities and Equity
Current assets	$	7,260,000		Short-term debt	$	8,060,000
				Long-term debt		1,588,750
Fixed assets		16,920,000
				Common stock	$	6,521,250
				Accumulated retained earnings		8,010,000
				Total equity	$	14,531,250
Total assets	$	24,180,000		Total liabilities and equity	$	24,180,000

  
a. Calculate the external funds needed for next year using the equation from the chapter. (Do not round intermediate calculations.)
  
External financing needed           $   
  
b-1. Prepare the firm’s pro forma balance sheet for next year. (Do not round intermediate calculations.)
   

BALANCE SHEET
Assets				Liabilities and equity
Current assets	$			Short-term debt	$
Fixed assets				Long-term debt
				Common stock	$
				Accumulated retained earnings
				Total equity	$
Total assets	$			Total liabilities and equity	$

b-2. Calculate the external funds needed. (Do not round intermediate calculations.)
  
External financing needed           $  

c. Calculate the sustainable growth rate for the company based on the current financial statements. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
  
Sustainable growth rate             %

Answer 1

a)
EFN = Assets/ Sales x ΔSales - Debt/ sales x ΔSales - (profit margin x projected sales) x(1 -d)
Total Assets/Sales = $24,180,000/31,000,000	78.00%
ΔSales = Current sales × Sales growth rate = $31,000,000 x 25%	$7,750,000
Debt/Sales = 8,060,000 / $31,000,000	26.00%
profit margin = Net income/Sales = 3,011,060/31,000,000	9.71%
Projected sales = Current sales × (1 + Sales growth rate) = $31,000,000 x (1+ 25%)	$38,750,000
d = Dividends/Net income = 1,204,424/3,011,060	$0.40
EFN = 0.78 x $7750000 - .26 x 7750000 - .0971 x 38750000 x (1- .40)	$1,771,705
b)
PROFORMA INCOME STATEMENT
Sales	$38,750,000
Costs = 26000300/30900000 x 38625000	$32,959,500
Taxable income	$5,790,500
Taxes @ 35%	$2,026,675
Net income	$3,763,825
Dividends @ 40%	$1,505,530
Addition to retained earnings	$2,258,295
Pro forma balance sheet
BALANCE SHEET
Assets		Liabilities and equity
Current assets = 7,260,000/31,000,000 x 38,750,000	$9,075,000	Short-term debt = 8,060,,000/31,000,000 x $38,750,000	$10,075,000
Fixed assets = 16,920,000/31,000,000 x 38,750,000	$21,150,000	Long-term debt	1588750
		Common stock	6521250
		Accumulated retained earnings	$10,268,295
		Total equity	$16,789,545
Total assets	$30,225,000	Total liabilities and equity	$28,453,295
EFN = Total assets – Total liabilities and equity
EFN = $30,225,000 - $28,453,295	$1,771,705
c)
Sustainable growth rate = ROE x b /(1- ROE x b)
ROE = Net income/Total equity = 3,763,825/14,531,250	25.90%
b = Retention ratio = Retained earnings/Net income = 1,806,636/14,531,250	60.00%
Sustainable growth rate = 25.90% x 60% /(1-(25.90% x 60%))	18.40%