Question

1. Shown below is Jensen Company’s projected income statement for year 2017, and the balance sheet as of the end of 2016.

Pro Forma Income Statement	2017		Balance Sheet	Dec. 31, 2016	Dec. 31 2017
Revenues	7,000,000		Cash	30,000
Depreciation	500,000		Inventory	270,000
Other Expenses	5,800,000		Fixed Assets (Net)	4,700,000
Income	700,000		Total Assets	5,000,000
Dividends	500,000		Payables	180,000
			LT. Debt	1,820,000
			Equity	3,000,000
			Liabilities + Equity	5,000,000

Sales are expected to increase from $5 million in 2016 to $7 million in 2017, and net income is expected to increase from $500,000 in 2016 to $700,000 in 2017.   To accommodate this sales growth Jensen will have to invest $3 million in a new warehouse and computerized distribution system. Working capital accounts, including cash, inventory, and payables, will grow at the same rate as sales. For simplicity, ignore interest on debt.

Compute Jensen’s “Internal Growth Rate”.   Will Jensen need external capital during 2017?

What, specifically, is the amount of External Funds Needed (EFN) as of the end of year 2017?  

Answer 1

		Internal Growth rate =(Retained Earnings)/(Total Assets)
		Net Income in 2017	$700,000
		Dividend Payment	$500,000
		Retained Earnings	$200,000
		Total Assets	$5,000,000
		Internal Growth Rate	0.04	(200000/5000000)
		Internal Growth Rate(%)	4%
		Internal Growth Rate (IGR)also can be calculated by following formula:
		IGR=ROA*R/(1-(ROA*R))
		ROA =Return on asset=Net Income/Total Asset
		R=Retention Ratio =(Retained earning)/(Net Income)
		IGR=(Net Income/Total Assets)*(Retained earnings/Net Income)
		IGR=(Retained Earnings/Total Assets)
		EXTERNAL FINANCE NEEDED
			A	B=A/5000000
		Item	Present Level 2016	Percent of sales		Projected Level 2017
		Sales	$5,000,000	100%	Sales	$7,000,000
		Net Income	$500,000	10%	Net Income	$700,000
		Cash	$30,000	0.60%	Cash	$42,000	(0.60% *7000000)
		Inventory	$270,000	5.4%	Inventory	$378,000	(5.4% *7000000)
		Fixed asset	$4,700,000	94.0%	Fixed asset	$6,580,000	(94%*7000000)
		Total Assets	$5,000,000	100%	Total Assets	$7,000,000
		Payable	$180,000	3.60%	Accounts Payable	$252,000	(3.6%*7000000)
		Long term Debt	$1,820,000	36%	Long term Debt	$1,820,000
		Equity	$3,000,000	60%	Equity	$3,000,000
		Liabilities+Equity	$5,000,000	100%
					Projected Source of Financing
					Retained Earning	$200,000
					External Financing Need	$1,728,000	(7000000-252000-1820000-3000000-200000)
					Total Liability +Equity +External Financing	$7,000,000
		Amount of External Financing Needed	$1,728,000