Question

The CFO of Morgan Co. has created the firm s pro forma balance sheet for the next fiscal year. Sales are projected to grow by 15 percent to $602 million. Current assets, fixed assets, and short-term debt are 22 percent, 65 percent, and 15 percent of sales, respectively. Morgan Co. pays out 30 percent of its net income in dividends. The company currently has $180 million of long-term debt and $140 million in common stock par value. The profit margin is 12 percent. Based on the CFO s sales growth forecast, how much does Morgan Co. need in external funds for the upcoming fiscal year? (Hint: you need to construct the balance sheet this year and determine the accumulated retained earnings before constructing the proforma balance sheets to determine the EFN)

		$5.97 million
		$5.78 million
		$5.36 million
		$5.12 million
		$4.83 million

Answer 1

Step 1
Balance sheet for this Year
Assets	in Millions	Liabilities and Equity	In Millions
Current Assets [$523.48 million * 22%]	$115.17	Short term debt [$523.48 million * 15%]	$78.52
Fixed Assets [$523.48 million * 65%]	$340.26	Long term debt	$180.00
		Common stock	$140.00
		Retained Earnings [balancing figure]	$56.91
Total Assets	$455.43	Total Liabilities and Equity	$455.43
This Year sales = Projected sales / [1+sales growth %] = $602 million / [1+0.15] = $523.48 million
Step 2
Calculation of need of external funds for the upcoming fiscal year
	Upcoming Year (in Millions)
Current assets [$602 million sales x 22%]	$132.44
Fixed assets [$602 million sales x 65%]	$391.30
Total Assets	$523.74
Less : Short term debt [$602 million x 15%]	$90.30
Less : This Year Long term debt	$180.00
Less : This year Common stock	$140.00
Less : Retained Earnings [$56.91 + $50.56]	$107.47
Need of external funds for upcoming year	$5.97
The answer is $5.97 million.
Working
Calculation of increase in retained earnings
	In Millions
Profit Margin @ 12% of $602 million sales	$72.24
Less : Dividend @ 30%	$21.68
Increase in Retained Earnings by	$50.56