Question

Problem 3-24 EFN and Internal Growth

The most recent financial statements for Retro Machine, 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.

RETRO MACHINE, INC. 2016 Income Statement
Sales				$	752,000
Costs					587,000
Other expenses					23,000
Earnings before interest and taxes				$	142,000
Interest paid					12,000
Taxable income				$	130,000
Taxes (30%)					39,000
Net income				$	91,000
Dividends	$	27,300
Addition to retained earnings		63,700

RETRO MACHINE, INC. Balance Sheet as of December 31, 2016
Assets				Liabilities and Owners’ Equity
Current assets				Current liabilities
Cash	$	21,140		Accounts payable	$	55,300
Accounts receivable		33,460		Notes payable		14,500
Inventory		70,420		Total	$	69,800
Total	$	125,020		Long-term debt	$	135,000
				Owners’ equity
Fixed assets				Common stock and paid-in surplus	$	121,000
Net plant and equipment	$	340,000		Accumulated retained earnings		139,220
				Total	$	260,220
Total assets	$	465,020		Total liabilities and owners’ equity	$	465,020

  
Complete the pro forma income statements below. (Do not round intermediate calculations and round your answers to the nearest whole number.)
   

Pro Forma Income Statement
		15% Sales Growth				25% Sales Growth				30% Sales Growth
Sales	$				$				$
Costs
Other expenses
EBIT	$				$				$
Interest
Taxable income	$				$				$
Taxes (30%)
Net income	$				$				$
Dividends	$				$				$
Add to RE

Complete the pro forma balance sheet for each sales growth rate. (Do not round intermediate calculations and round your answers to the nearest whole number.)

15% Sales Growth:
  

Pro Forma Balance Sheet
Assets				Liabilities and Owners’ Equity
Current assets				Current liabilities
Cash	$			Accounts payable	$
Accounts receivable				Notes payable
Inventory				Total	$
Total	$			Long-term debt	$
				Owners’ equity
Fixed assets				Common stock and paid-in surplus	$
Net plant and equipment	$			Accumulated retained earnings
				Total	$
Total assets	$			Total liabilities and owners’ equity	$

25% Sales Growth:

Pro Forma Balance Sheet
Assets				Liabilities and Owners’ Equity
Current assets				Current liabilities
Cash	$			Accounts payable	$
Accounts receivable				Notes payable
Inventory				Total	$
Total	$			Long-term debt	$
				Owners’ equity
Fixed assets				Common stock and paid-in surplus	$
Net plant and equipment	$			Accumulated retained earnings
				Total	$
Total assets	$			Total liabilities and owners’ equity	$

30% Sales Growth:
  

Pro Forma Balance Sheet
Assets				Liabilities and Owners’ Equity
Current assets				Current liabilities
Cash	$			Accounts payable	$
Accounts receivable				Notes payable
Inventory				Total	$
Total	$			Long-term debt	$
				Owners’ equity
Fixed assets				Common stock and paid-in surplus	$
Net plant and equipment	$			Accumulated retained earnings
				Total	$
Total assets	$			Total liabilities and owners’ equity	$

Calculate the EFN for 15, 25, and 30 percent growth rates. (Do not round intermediate calculations and round your answers to the nearest whole number. A negative answer should be indicated by a minus sign.)

	15%			25%			30%
EFN	$			$			$

Answer 1

The pro forma income statement for each of the growth rate is shown below
	15% Sales growth	Calculation	25% sales growth	Calculation	30% sales growth	Calculation
Sales	$864,800	752000*1.15	$940,000	752000*1.25	$977,600	752000*1.30
Costs	$675,050	587000*1.15	$733,750	587000*1.25	$763,100	587000*1.30
Other expenses	$26,450	23000*1.15	$28,750	23000*1.25	$29,900	23000*1.30
EBIT	$163,300		$177,500		$184,600
Interest	$12,000		$12,000		$12,000
Taxable income	$151,300		$165,500		$172,600
Taxes (30%)	$45,390		$49,650		$51,780
Net income	$105,910		$115,850		$120,820
Dividends	$31,773	(27300/91000)*105910	$34,755	(27300/91000)*115850	$36,246	(27300/91000)*120820
Add to RE	$74,137		$81,095		$84,574
Pro forma balance sheet with 15% sales growth is shown below
Pro Forma Balance Sheet
Assets		Calculation	Liabilities and Owners’ Equity		Calculation
Current assets			Current liabilities
Cash	$24,311	21140*1.15	Accounts payable	$63,595	55300*1.15
Accounts receivable	$38,479	33460*1.15	Notes payable	$14,500
Inventory	$80,983	70420*1.15	Total	$78,095
Total			Long-term debt	$135,000
			Owners’ equity
Fixed assets			Common stock and paid-in surplus	$121,000
Net plant and equipment	$391,000	340000*1.15	Accumulated retained earnings	$213,357	139220+74137
			Total	$334,357
Total assets	$534,773		Total liabilities and owners’ equity	$547,452
Calculation of external financing needed at 15% growth rate
EFN	Total assets - Total liabilities and equity
EFN	534773-547452
EFN	-$12,679
Pro forma balance sheet with 25% sales growth is shown below
Pro Forma Balance Sheet
Assets		Calculation	Liabilities and Owners’ Equity		Calculation
Current assets			Current liabilities
Cash	$26,425	21140*1.25	Accounts payable	$69,125	55300*1.25
Accounts receivable	$41,825	33460*1.25	Notes payable	$14,500
Inventory	$88,025	70420*1.25	Total	$83,625
Total			Long-term debt	$135,000
			Owners’ equity
Fixed assets			Common stock and paid-in surplus	$121,000
Net plant and equipment	$425,000	340000*1.25	Accumulated retained earnings	$220,315	139220+81095
			Total	$341,315
Total assets	$581,275		Total liabilities and owners’ equity	$559,940
Calculation of external financing needed at 25% growth rate
EFN	Total assets - Total liabilities and equity
EFN	581275-559940
EFN	$21,335
Pro forma balance sheet with 30% sales growth is shown below
Pro Forma Balance Sheet
Assets		Calculation	Liabilities and Owners’ Equity		Calculation
Current assets			Current liabilities
Cash	$27,482	21140*1.30	Accounts payable	$71,890	55300*1.30
Accounts receivable	$43,498	33460*1.30	Notes payable	$14,500
Inventory	$91,546	70420*1.30	Total	$86,390
Total			Long-term debt	$135,000
			Owners’ equity
Fixed assets			Common stock and paid-in surplus	$121,000
Net plant and equipment	$442,000	340000*1.30	Accumulated retained earnings	$223,794	139220+84574
			Total	$344,794
Total assets	$604,526		Total liabilities and owners’ equity	$566,184
Calculation of external financing needed at 25% growth rate
EFN	Total assets - Total liabilities and equity
EFN	604526-566184
EFN	$38,342
The pro forma balance sheet for each growth rate does not tally due to additional funds available or additional funding required due to increase in growth of sales revenue.
	15%	25%	30%
EFN	-$12,679	$21,335	$38,342