Question

Problem 3-13 External Funds Needed

The Optical Scam Company has forecast a sales growth rate of 20 percent for next year. The current financial statements are shown here:

  

Income Statement
Sales			$	31,200,000
Costs				26,673,600
Taxable income			$	4,526,400
Taxes				1,584,240
Net income			$	2,942,160
Dividends	$	1,176,864
Addition to retained earnings		1,765,296

  

Balance Sheet
Assets				Liabilities and Equity
Current assets	$	7,280,000		Short-term debt	$	6,552,000
				Long-term debt		5,248,000
Fixed assets		19,240,000
				Common stock	$	2,902,000
				Accumulated retained earnings		11,818,000
				Total equity	$	14,720,000
Total assets	$	26,520,000		Total liabilities and equity	$	26,520,000

  

a.	Calculate the external financing needed for next year. (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)

  

External financing needed

$

  

b-1.	Prepare the firm’s pro forma balance sheet for next year. (Do not round intermediate calculations and round your answers to the nearest whole number, e.g., 32.)

Balance Sheet
Assets		Liabilities and equity
Current assets	$	Short-term debt	$
		Long-term debt
Fixed assets
		Common stock	$
		Accumulated retained earnings
		Total equity
Total assets	$	Total liabilities and equity	$

  

b-2.	Calculate the external financing needed. (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)

  

External financing needed

$

  

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.)

  

Sustainable growth rate

%

References

eBook & Resources

Answer 1

a.

Net Income = $2,942,160

Dividend payment =1,176,864

Addition to retained earnings = $1,765,296

Now.

External finance needed = (Growth rate × Total Assets) - Addition to retained earnings

= (20% × $26,520,000) - $1,765,296

= $5,304,00 - $$1,765,296

= $3,538,704

External Finance needed is $3,538,704.

b.

Retention Ratio = $1,765,296 / $2,942,160

                          = 60%

Retention ratio of company is 60%.

Return on equity = Net Income / total equity

                            = $2,942,160 / 14,720,000

                            = 19.99%

Return on equity is 19.99%.

Sustainable Growth rate is calculated below using following formula:

Sustainable Growth rate = Retention ratio × return on equity

                                        = 60% × 19.99%

                                        = 11.99%

Hence, Sustainable Growth rate is 11.99%.