Question

Based on the Income Statement and Balance Sheet for the XYZ Corporation (see below):

        a) create the Pro Forma statement for 2015 given the following assumptions:

- sales increase by 20%

- all items vary directly with sales (except for Notes Payable, LTD, Owners Equity)

- the company is currently operating at 100% capacity

- the dividend payout ratio stays at 50%

            Income Statement

	2015	Pro Forma 2016
Sales	$3,000,000
Cost of Goods Sold	2,000,000
Depreciation	300,000
EBIT	700,000
Interest	200,000
Taxable Income	500,000
Taxes (40%)	200,000
Net Income	$300,000
Dividends	$150,000
Add. to Retained Earnings	$150,000

Balance Sheet

Assets				Liabilities & Owner's Equity
	2015	Pro Forma 2016				2015	Pro Forma     2016
Cash	$190,000				Accounts Payable	$330,000
Accounts Receivable	450,000				Notes Payable	270,000
Inventory	360,000				Current Liabilities	$600,000
Current Assets	1,000,000
					Long-term Debt	2,000,000
Net Fixed Assets	3,000,000				Total Liabilities	2,600,000
					Common Stock	1,000,000
					Retained Earnings	400,000
Total Assets	$4,000,000				Total	$4,000,000

b) What is the external financing needed (if any)?

       Answer___________________________

c) What is the Sustainable Growth Rate for the XYZ Corporation in 2015?

       Answer___________________________________

Answer 1

Statement showing income statement

Particulars	2015	2016
Sales	3000000	3600000
COGS	2000000	2400000
As % of sales	66.67%	66.67%
Depreciation	300000	360000
As % of sales	10.00%	10%
EBIT	700000	840000
As % of sales	23.33%	23.33%
Interest	200000	240000
As % of sales	6.67%	6.67%
Taxable income	500000	600000
As % of sales	16.67%	16.67%
Tax @ 40%	200000	240000
As % of Taxable income	40%	40%
Net income	300000	360000
Dividend	150000	180000
As % of Net income	50%	50%
Retain earning	150000	180000

Statement showing projected balance sheet

Asset	2015	2016	Liability	2015	2016
Cash	190000	228000	Accounts Payable	330000	396000
As % of sales	6.33%	6.33%	As % of sales	11%	11%
Account receivable	450000	540000	Notes Payable	270000	270000
As % of sales	15%	15%
Inventory	360000	432000	Current Liabilities	600000	666000
As % of sales	12%	12%
Current Assets	1000000	1200000	Long-term Debt	2000000	2000000
			External borrowings(balance)		554000
Net Fixed Assets	3000000	3600000	Total Liabilities	2600000
As % of sales	100%	100%
			Common Stock	1000000	1000000
			Retained Earnings	400000	580000
Total	4000000	4800000		4000000	4800000

Ans to b = 554000

Ans to c

Growth rate = Retention ratio * return on equity

=50% * 300000/1000000

=50%*30%

=40%