Question

Delta has 500,000 common shares outstanding. The firm is projecting a 20% increase in net sales for the coming year (20X3). Delta uses the percentage of sales approach to plan for its financing needs. In using this approach, the firm assumes that cost of goods sold, depreciation, all assets (current and fixed), and accounts payable will all remain a constant percentage of sales. The firm will aim to maintain its dividend payout of 35% for the foreseeable future. The interest rate charged on notes payable and long-term debt is also expected to remain the same in.

1. Construct the pro-forma statement of comprehensive income and statement of financial position for Delta Corporation for 20X3. Calculate the external financing needed (EFN) for 20X3. Round all your numbers in the pro-forma statements to the nearest dollar.

2. How will the external financing needed (EFN) for 20X3 be affected if Delta is only operating at 70% capacity? Interpret this EFN number, and explain what the firm can do with it.

3.What is Delta’s internal growth rate for 20X2? Round your final answer in percentage to two decimal places.

4.What is Delta’s sustainable growth rate for 20X2? Round your final answer in percentage to two decimal places.

5.Explain how Delta could go bankrupt if it wants to grow its sales by 100% for 20X3.

Year	20X1	20X2
Net sales	$1,200,000	$1,335,481
Cost of goods sold	540,000	600,966
Depreciation	180,000	200,322
Interest paid	43,120	42,960
Cash	102,000	113,516
Accounts receivable	360,000	400,644
Inventory	360,000	400,644
Net fixed assets	1,440,000	1,602,577
Accounts payable	300,000	333,870
Notes payable	39,000	37,000
Long-term debt	500,000	500,000
Common stock	1,000,000	1,000,000
Retained earnings	423,000	646,511
Tax rate	30%	30%
Dividend payout	35%	35%

Answer 1

Answer of question-1

Statement of Comprehensive Income

Particulars	Amount ($) 2003
Net Sales (1335481+20%)	1602577
Cost of goods sold (45% of sales)	721160
Depreciation (15% of sales)	240387
Interest (8% of notes payable and long term debts)	42960
Net profit before tax	598070
Tax (30%)	179421
Profit after tax	418649
Dividend (35%)	146527
Retained earnings	272122

Statement of Financial Position

Liabilities	Amount ($)	Assets	Amount ($)
Common Stock	1000000	Fixed Assets (120% of sales)	1926332
Retained earning - 646511		Accounts receivables (30% of sales)	481583
Add - profit - 272122	918633	inventory (30% of sales)	481583
Accounts payable(25% of sales)	400644
Notes payable	37000	Cash (8.5% of sales)	136449
Long term debt	500000
External Financing (Balancing figure)	169670
Total	3025947	Total	3025947

2. Since the firm is running on 70% capacity, the external financing can be used to fulfil the working capital requirements. The external financing could be used to develop new product so that the remaining capacity can be utilised. The firm can also use the external financing in advertising and branding, to increase the customer base to increase the demand of the products. And the capacity can be utilised.

3. Delta internal growth rate for 2002 as compare to 2001 is 11.29%

5. Delta could go bankrupt if it takes external financing to increase its sales by 100% but could not succeed. Interest burden on loan will increase and fixed cost of in form of interest will convert the profit in losses. In that way Delta can bankrupt.