Question

The latest income statement, balance sheet and other related information for ABC Company is as follows:

Net Sales Revenue = $1,000,000 COGS = $600,000 (60% of Sales)

Operating Expenses = $200,000 (20% of Sales)

Interest Expense = $20,000 (10% of Long Term Debt)

Tax Expense = $54,000 (30% of Earnings Before Taxes)

Net Income = $126,000

Addition to Retained Earnings = $88,200 (70% of Net Income)

Current Assets = $700,000 (70% of Sales)

Net Fixed Assets = $900,000 (90% of Sales)

Current Liabilities = $200,000 (20% of Sales)

Long Term Debt = $200,000 (n/a)

Common Stock = $300,000 (n/a)

Retained Earnings = $900,000 (n/a)

1. Given the existing information, the Sustainable Growth Rate is (please round up to the nearest integer percentage such as 8):

% From now on, please assume that the company's sales will grow at 8% for the following year. Estimate the following regarding the proforma statements. 2. The proforma EBIT is: $

3. The initial proforma Interest Expense estimation is: $

4. Assuming the same tax rate of 30%, the proforma net income is: $

5. Assuming the same plowback ratio of 70%, the proforma addition to retained earnings is: $

6. Assuming 100% capacity usage, the proforma TOTAL assets are: $

7. The proforma current liabilities are: $

8. The proforma retained earnings are: $

9. The External Financing Need is: $

10. Assuming the EFN will be fulfilled by increasing the LTD, the proforma LTD (to balance the balance sheet) is: $

11. With the updated LTD you just calculated, assuming a 10% interest rate, the corrected interest expense (end of first iteration) is: $

12. If the current capacity usage is at 80%, then the proforma net fixed assets are: $

Answer 1

SOLUTION:-

1. Computation of sustainable growth rate:

Sutainable growth rate = Retention rate Return on equity

Excel spread sheet:

Excel wirkings:

2. Computation of EBIT:

Excel spread sheet:

Excel workings:

3. Computation of initial proforma expense:

The interest expenses will remain same as $20,000 since there is no change in long term debt.

4. Computation of next income:

Excel spread sheet:

Excel workings:

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