In: Finance
The Optical Scam Company has forecast a sales growth of 25 percent for next year. The current financial statements are shown here: |
Income Statement | ||||
Sales | $ | 32,000,000 | ||
Costs | 26,309,400 | |||
Taxable income | $ | 5,690,600 | ||
Taxes | 1,991,710 | |||
Net income | $ | 3,698,890 | ||
Dividends | $ | 1,479,556 | ||
Addition to retained earnings | 2,219,334 | |||
Balance Sheet | |||||||
Assets | Liabilities and Owners' Equity | ||||||
Current assets | $ | 7,360,000 | Accounts payable | $ | 7,040,000 | ||
Long-term debt | 2,240,000 | ||||||
Fixed assets | 18,560,000 | ||||||
Common stock | $ | 6,070,000 | |||||
Accumulated retained earnings | 10,570,000 | ||||||
Total equity | $ | 16,640,000 | |||||
Total assets | $ | 25,920,000 | Total liabilities and equity | $ | 25,920,000 | ||
a. |
Using the equation from the chapter, calculate the external financing needed for next year. (Do not round intermediate calculations and round your answer to the nearest whole dollar amount, e.g., 32.) |
b-1. |
Construct the firm’s pro forma balance sheet for next year. (Do not round intermediate calculations and round your answers to the nearest whole dollar amount, e.g., 32.) |
b-2. |
Calculate external financing needed. (Do not round intermediate calculations and round your answer to the nearest whole dollar amount, e.g., 32.) |
c. |
Calculate the sustainable growth rate for the company based on the current financial statements. (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) |
a. External Funding Needed using Formula = Assets * Increase in sales - spontaneous Liabilities * Increase in sales - Addition to retained earnings
External Funding Needed using Formula = 25920000 * 25% - 7040000 * 25% - Current Addition to retained earnings * (1 + Increase in sales)
External Funding Needed using Formula = 25920000 * 25% - 7040000 * 25% - 2219334 * (1 + 25%)
External Funding Needed using Formula = $1945833
b.
b-2. Calculate external financing needed.=$1945833
c. sustainable growth rate = (ROE * retention ratio) / (1 - ((ROE * retention ratio)))
ROE = Net income / Equity = 3698890 / 16640000 = 22.23%
sustainable growth rate = (ROE * retention ratio) / (1 - ((ROE * retention ratio))
sustainable growth rate = (22.23% * 2219334/3698890) / (1 - ((ROE * retention ratio))
sustainable growth rate = 0.13373 / (1 - 0.13373)
sustainable growth rate = 15.39%