Question

Consider the following recent financials for XYZ Corporation:

Income Statement		Balance Sheet
Sales	63,252	Assets	122,852	Debt	28,164
Costs	37,951			Equity	94,688
EBIT	25,301
Taxes @ 38%	9,614	Total	122,852	Total	122,852
Net Income	15,687

    

Assets and costs are proportional to sales. Debt and equity are not. A dividend of $2,918 was paid, and the company wishes to maintain a constant payout ratio. Next year’s sales are projected to grow by 20%.

What is the pro-forma value for equity? (Round answer to 2 decimal places. Do not round intermediate calculations).

What is the external financing needed using the pro-forma approach? (Round answer to 2 decimal places. Do not round intermediate calculations).

What is the internal growth rate? (Report answer in percentage terms and round to 2 decimal places. Do not round intermediate calculations).

What is the sustainable growth rate? (Report answer in percentage terms and round to 2 decimal places. Do not round intermediate calculations).

Answer 1

Proforma value of equity = $110,011

External financing required = $9,076 ($37,240 - $28,164)

Internal growth rate = 11.61%

Sustainable growht rate = 3.52%

Workings:

Net income	18824
Dividend (18.60%)	3501
Net income retained	15323
Beginning equity	94688
Ending equity	110011

Sales will increase by 20%. Costs are 60% of sales and assets are 194% of sales. Hence we take these percentages for the proforma workings. The tax rate will be same.

Proforma financial statement for the next year:
Income Statement			Balance Sheet
Sales	75,902		Assets	1,47,251	Debt	37,240
Costs	45,541	60%		194%	Equity	1,10,011
EBIT	30,361
Taxes @ 38%	11,537		Total	1,47,251	Total	1,47,251
Net Income	18,824

Recent financial statement:
Income Statement			Balance Sheet
Sales	63,252		Assets	1,22,852	Debt	28,164
Costs	37,951	60%		194%	Equity	94,688
EBIT	25,301
Taxes @ 38%	9,614		Total	1,22,852	Total	1,22,852
Net Income	15,687

Internal growth rate=ROA xb / (1-ROA x b)
ROA = Net income / Total assets = 18824/147251
12.78%
b= 1-dividend payout raio = 1-18.60= 81.40%
Internal growth rate = 12.78% X 81.40% / (1-12.78%x81.40%)
=0.104029/0.895971
= 0.116108 or 11.61%
Sustainable growth rate = Asset utilisation rate x profitability rate x financial utilization rate X (1-Dividend rate)
Asset utilisation rate = Sales / Total assets = 75902/147251 = 0.5155
Profitability rate   = Net income / Sales = 18824/75902 = 0.2480
Financial utilization rate = Total debt / Total equity = 37240 / 110011 = 0.3385
Dividend rate = Dividend / Net income = 3501/18824 = 0.1860
Sustainable growth rate = 0.5155 x 0.2480 x 0.3385 x (1-0.1860) = 0.352 or 3.52%