Question

Apex Roofing Inc. has the following balance sheet (in millions of dollars): Current assets $3.0 Accounts payable $1.2 Net fixed assets 4.0 Notes payable 0.8 Accrued wages and taxes 0.3 Total current liabilities $2.3 Long-term debt 1.2 Common equity 1.5 Retained earnings 2.0 Total assets $7.0 Total liabilities and equity $7.0 Last year's sales were $10 million, and Apex estimates it will need to raise $2 million in new debt and equity next year. You have identified the following facts: (1) it pays out 30 percent of earnings as dividends; (2) a profit margin of 4 percent is projected; (3) fixed assets were used to full capacity; and (4) assets and spontaneous liabilities as shown on last year's balance sheet are expected to grow proportionally with sales. If the above assumptions hold, what sales growth rate is the firm anticipating? Use the AFN equation

Answer 1

	liabilities and equity	Amount (in million dollars)	Assets	Amount (in million dollars)
	Accounts Payable	$1.20	Current Assets	$3
	Notes payable	$0.08	Net fixed assets	$4
	Accrued wages and taxes	$0.30
	Other current liabilities $(2.3-1.2-0.08-0.03)	$0.72
	Long-term debt	$1.20
	Common equity	$1.50
	Retained earnings	$2
	Total liabilities and equity	$7	Total assets	$7
	Divided payout	30%
	Retention ratio	70%
	Projected profit margin	4%
	Profit in current year(Retained earnings/retention ratio)	$2.86
	Sales in current year (Profit in current year/profit margin)	$71.43
	Last year sales	$10.00
B)	Growth rate of Sales ((71.43-10)/10*100)	614.3%
	Growth rate of spontaneous liabilities= Growth rate of assets= Growth rate in Sales	614.3%
A)	AFN = (A/S0)ΔS – (L/S0)ΔS – M*S1*RR	($16.12)
		=(7/10)61.43 – (2.3*/10)61.43 – 2.86*70%
	RR=the retention ratio from net income (equal to 1 minus the dividend payout ratio; disregard if dividends are not declared)
	A(Assets tied directly to sales)	$7
	L(spontaneous liabilities that are affected by sales)	$2.30
	S0(previous year’s sales)	$10
	S1(total projected sales for next year)	$71.43
	ΔS(change in sales between S0 and S1)	$61.43
	M(profit margin)	4%
	M*S1(projected net income)	$2.86
	RR(Retention ratio)	70%