Question

The most recent financial statements for Scott, Inc., appear below. Sales for 2020 are projected to grow by 25 percent. Interest expense will remain constant; the tax rate and the dividend payout rate also will remain constant. Costs, other expenses, current assets, fixed assets, and accounts payable increase spontaneously with sales. What is the EFN if the firm wishes to keep its debt-equity ratio constant?

SCOTT, INC. 2019 Income Statement
Sales				$	772,000
Costs					628,000
Other expenses					33,500
Earnings before interest and taxes				$	110,500
Interest expense					17,600
Taxable income				$	92,900
Taxes (24%)					22,296
Net income				$	70,604
Dividends	$	19,940
Addition to retained earnings		50,664

SCOTT, INC. Balance Sheet as of December 31, 2019
Assets				Liabilities and Owners’ Equity
Current assets				Current liabilities
Cash	$	26,140		Accounts payable	$	65,000
Accounts receivable		35,650		Notes payable		20,300
Inventory		72,230		Total	$	85,300
Total	$	134,020		Long-term debt	$	120,000
				Owners’ equity
Fixed assets				Common stock and paid-in surplus	$	119,000
Net plant and equipment	$	229,000		Retained earnings		38,720
				Total	$	157,720
Total assets	$	363,020		Total liabilities and owners’ equity	$	363,020

Answer 1

Answer : EFN is 8775.41

Proforma Income Statement
Sales (Cuurent sales * 1.25)	965000
Less :Costs (Current Costs * 1.25)	785000
Less : Other Expense (Current Other Expenses * 1.25)	41875
EBIT	138125
Less :Interest Expenses	17600
Taxable Income	120525
Taxes @ 24%	28926
Net Income	91599

As given payout ratio is constant,

so dividend paid this year = payout ratio from last year multipled by net income this year

Dividends = (19940 / 70604 ) * (91599)

= $25869.4133471 or 25869.41

So addition to retained earnings will be:

Addition to retained earnings = 91599 - 25869.4133471

=65729.59

The new retained earnings on the pro forma balance sheet will be

New retained earnings = 38720 + 65729.59

= 104449.59

Proforma Balance sheet

Proforma Balance Sheet.	(After Increase)
Assets	Amount	Liabilities and Equity	Amount
Cash	32675	Current Liabilities
Accounts Receivabbles	44562.5	Accounts Payable	81250
Inventory	90287.5	Notes Payable	20300
Total Current Assets	167525	Total	101550
		Long Term Debt	120000
Fixed Assets		Common stock	119000
Net Plant and Equipment	286250	Retained Earnings	104449.59
Total Assets	453775		444999.59

So the EFN will be =

= Total Asset - Total liablities & eqities

= 453775 - 444999.59

=$ 8775.41