Question

A company’s financial manager believes that sales in 2019 could rise by as much as 20% or by as little as 10%. Prepare the pro-forma financial statements under the two assumptions and calculate external financing required. Then, determine the sustainable growth rate.

	2018	2019 - 20% Growth	2019 – 10% Growth
Sales	$6,500
COGS	$3,500
SG&A	$2,350
Interest	$130
Tax	$280
Dividends	$280
Cash	$100
A/R	$400
Inventory	$650
PP&E	$2,600
A/P	$500
Long-term Debt	$1,300
Common Shares	$100
R/E	??

Answer 1

Ans:

In $	2018	2019 - 20% Growth	2019 – 10% Growth
Sales	6,500	7,800	7,150
COGS	3,500	4,200	3,850
SG&A	2,350	2,820	2,585
Operating profit	650	780	715
Interest	130	130	130
Interest cost % of long term debt	10%	10%	10%
Profit before tax	520	650	585
Tax	280	350	315
Tax rate	53.8%	53.8%	53.8%
Net income	240	300	270
Dividends	280	350	315
Dividend payout	117%	117%	117%
Addition to retained earnings	-40	-50	-45
Cash	100	100	100
A/R	400	480	440
Inventory	650	780	715
PP&E	2,600	3,120	2,860
A/P	500	600	550
Long term debt	1,300	1,980	1,660
Common shares	100	100	100
Retained earnings (calculated)	1,850	1,800	1,805
Return on equity	12%	16%	14%
Cash flow	2018	2019 - 20% Growth	2019 – 10% Growth
Net income	240	300	270
Increase in working capital:
A/R		-80	-40
Inventory		-130	-65
Payable		100	50
Cash from operation		190	215
Increase in fixed assets		-520	-260
Dividend paid		-350	-315
Cash flow before financing		-680	-360
long term Financing needed		680	360
Change in cash		0	0

Excel formula: