Question

Marc and Ali have been running an enterprise called as Deep Water Experts, a retail business based out of Dubai. They are planning to expand their business into the neighboring GCC countries. The two partners approach you about planning for next year’s sales. The Company had historically used little planning for investment needs. As a result, the company experienced some challenging times because of cash flow problems. The lack of planning resulted in missed sales, as well as periods when Marc and Ali were unable to draw salaries. To this end, they would like you to prepare a financial plan for the next year so the company can begin to address any outside investment requirements. The income statement and balance sheet are shown below:

Income Statement	2019 (Dhs/AED)
Sales	55,000,000
COGS	37,185,000
Sales, General & Administrative expenses	8,250,000
Depreciation	3,857,000
EBIT	5,708,000
Interest paid	1,732,000
EBT/ Taxable Income	3,976,000
Taxes	1,113,000
Net Income	2,863,000

Balance Sheet 2019
Assets	AED	Debt & Equity	AED
Cash	5,712,000	Accounts payable	2,310,000
Accounts Receivable	2,355,000	Notes Payable	1,350,000
Inventory	3,998,000	Current liabilities	3,660,000
Current Assets	12,065,000	Long-term debt	21,655,000
Net Fixed Assets	38,565,000	Total debt	25,315,000
		Equity	20,542,000
		Retained earnings	4,773,000
		Total equity	25,315,000
Total Assets	50,630,000	Total debt & equity	50,630,000

Balance Sheet 2018
Assets	AED	Debt & Equity	AED
Cash	3,236,000	Accounts payable	1,865,000
Accounts Receivable	2,139,000	Notes Payable	1,123,000
Inventory	2,598,000	Current liabilities	2,988,000
Current Assets	7,973,000	Long-term debt	14,935,000
Net Fixed Assets	34,950,000	Total debt	17,923,000
		Equity	22,517,000
		Retained earnings	2,483,000
		Total equity	25,000,000
Total Assets	42,923,000	Total debt & equity	42,923,000

Questions:

1. Calculate the internal growth rate and sustainable growth rate for Deep Water Experts.

2. Deep Water Experts is planning for a growth rate of 12% next year. Calculate the EFN for the company is operating at full capacity.

3. Fixed Assets must be increased in specific amounts. If the company needs to increase production now, they must set up a new line of machinery at a cost of AED 15,000,000. Calculate the new EFN with this assumption.

Answer 1