Question
In: Accounting
Consider the following recent financials for XYZ Corporation: Income Statement Balance Sheet Sales 63,252 Assets 122,852...
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).
Solutions
Expert Solution
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% | ||||||||
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