Question

The most recent financial statements for Fleury 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.

FLEURY, INC. 2011 Income Statement
Sales				$	743,000
Costs					578,000
Other expenses					15,200
Earnings before interest and taxes				$	149,800
Interest paid					11,200
Taxable income				$	138,600
Taxes (35%)					48,510
Net income				$	90,090
Dividends	$	27,027
Addition to retained earnings		63,063

FLEURY, INC. Balance Sheet as of December 31, 2011
Assets				Liabilities and Owners’ Equity
Current assets				Current liabilities
Cash	$	20,240		Accounts payable	$	54,400
Accounts receivable		32,560		Notes payable		13,600
Inventory		69,520		Total	$	68,000
Total	$	122,320		Long-term debt	$	126,000
				Owners’ equity
Fixed assets				Common stock and paid-in surplus	$	112,000
Net plant and equipment	$	330,400		Retained earnings		146,720
				Total	$	258,720
Total assets	$	452,720		Total liabilities and owners’ equity	$	452,720
Complete the pro forma income statements below. (Input all amounts as positive values.)      FLEURY INC. Pro Forma Income Statement 15 % Sales Growth 20 % Sales Growth 25 % Sales Growth   Sales $ $ $   Costs   Other expenses   EBIT $ $ $   Interest   Taxable income $ $ $   Taxes (35%)   Net income $ $ $      Dividends $ $ $      Add to RE     Calculate the EFN for 15, 20 and 25 percent growth rates. (Negative amounts should be indicated by a minus sign.)    15% 20% 25%   EFN $    $    $

Answer 1

Fleury Inc.
Pro Forma Income Statement
	15% growth rate	20% growth rate	25% growth rate
Sales	$8,54,450	$8,91,600	$9,28,750
Costs	$6,64,700	$6,93,600	$7,22,500
Other expenses	$17,480	$18,240	$19,000
EBIT	$1,72,270	$1,79,760	$1,87,250
Interest	$11,200	$11,200	$11,200
Taxable income	$1,61,070	$1,68,560	$1,76,050
Taxes(35%)	$56,375	$58,996	$61,618
Net income	$1,04,696	$1,09,564	$1,14,433
Dividends	$31,409	$32,869	$34,330
Add to RE	$73,287	$76,695	$80,103

Working notes:

Dividends payout ratio = 27027 / 90090

= 30%

External financing required = Increase in assets - increaae in spontenous liabilities - increase in retained earnings

Increase in assets = current level of assets * sales growth rate

Increase in spontenous liabilites = 54400 * sales growth rate

Increase in retained earnings = new sales leve * profit margin*retention ratio

	15% growth rate	20% growth rate	25% growth rate
Increase in assets	$67,908	$90,544	$1,13,180
Increase in spontenous liab.	$8,160	$10,880	$13,600
New sales level	$8,54,450	$8,91,600	$9,28,750
Increase in retained earnigs	$73,287	$76,473	$79,660
EFN	-$13,539	$3,191	$19,920