Sales $ 41,400 Assets $ 30,360 Debt $ 7,245 Costs 34,270 Equity 23,115 Net income $ 7,130 Total $ 30,360 Total $ 30,360

Size: px

Start display at page:

Download "Sales $ 41,400 Assets $ 30,360 Debt $ 7,245 Costs 34,270 Equity 23,115 Net income $ 7,130 Total $ 30,360 Total $ 30,360"

Rhoda Strickland
7 years ago
Views:

1 1. It is important to remember that equity will not increase by the same percentage as the other assets. If every other item on the income statement and balance sheet increases by 15 percent, the pro forma income statement and balance sheet will look like this: Sales $ 41,400 Assets $ 30,360 Debt $ 7,245 Costs 34,270 Equity 23,115 Net income $ 7,130 Total $ 30,360 Total $ 30,360 In order for the balance sheet to balance, equity must be: Equity = Total liabilities and equity Debt Equity = $30,360 7,245 Equity = $23,115 Equity increased by: Equity increase = $23,115 20,100 Equity increase = $3,015 Net income is $7,130 but equity only increased by $3,015; therefore, a dividend of: Dividend = $7,130 3,015 Dividend = $4,115 must have been paid. Dividends paid is the plug variable. 2. Here we are given the dividend amount, so dividends paid is not a plug variable. If the company pays out one-half of its net income as dividends, the pro forma income statement and balance sheet will look like this: Sales $41,400 Assets $30,360 Debt $ 6,300 Costs 34,270 Equity 23,665 Net income $ 7,130 Total $30,360 Total $29,965 Dividends $3,565 Add. to RE $3,565 Note that the balance sheet does not balance. This is due to EFN. The EFN for this company is: EFN = $30,360 29,965 EFN = $ An increase of sales to $8,968 is an increase of: Sales increase = ($8,968 7,600) / $7,600 Sales increase =.18, or 18%

2 Assuming costs and assets increase proportionally, the pro forma financial statements will look like this: Sales $ 8, Assets $25, Debt $ 9, Costs 6, Equity 15, Net income $ 2, Total $25, Total $24, If no dividends are paid, the equity account will increase by the net income, so: Equity = $12, , Equity = $15, So the EFN is: EFN = $25,606 24, EFN = $1, An increase of sales to $32,085 is an increase of: Sales increase = ($32,085 27,900) / $27,900 Sales increase =.15, or 15% Assuming costs and assets increase proportionally, the pro forma financial statements will look like this: Sales $ 32,085 Assets $ 77,050 Debt $ 27,400 Costs 20,815 Equity 43,602 EBIT 11,270 Total $ 77,050 Total $ 71,002 Taxes (40%) 4,508 Net income $ 6,762 The payout ratio is constant, so the dividends paid this year is the payout ratio from last year times net income, or: Dividends = ($2,400 / $5,880)($6,762) Dividends = $2,760 The addition to retained earnings is: Addition to retained earnings = $6,762 2,760 Addition to retained earnings = $4,002 And the new equity balance is: Equity = $39, ,002 Equity = $43,602

3 So the EFN is: EFN = $77,050 71,002 EFN = $6, Assuming costs, current liabilities, and assets increase proportionally, the pro forma financial statements will look like this: Sales $7, CA $4, CL $2, Costs 5, FA 9, LTD 3, Taxable income $2, Equity 7, Taxes (34%) TA $14, Total D&E $14, Net income $1, The payout ratio is 40 percent, so dividends will be: Dividends =.40($1,745.70) Dividends = $ The addition to retained earnings is: Addition to retained earnings = $1, Addition to retained earnings = $1, So the EFN is: EFN = $14,605 14, EFN = $ To calculate the internal growth rate, we first need to calculate the ROA, which is: ROA = NI / TA ROA = $3,480 / $36,600 ROA =.0951, or 9.51% Now we can use the internal growth rate equation to get: Internal growth rate = (ROA b) / [1 (ROA b)] Internal growth rate = [.0951(.70)] / [1.0951(.70)] Internal growth rate =.0713, or 7.13%

4 7. To calculate the sustainable growth rate, we first need to calculate the ROE, which is: ROE = NI / TE ROE = $3,480 / $20,200 ROE =.1723, or 17.23% Now we can use the sustainable growth rate equation to get: Sustainable growth rate = (ROE b) / [1 (ROE b)] Sustainable growth rate = [.1723(.70)] / [1.1723(.70)] Sustainable growth rate =.1371, or 13.71% 8. The maximum percentage sales increase is the sustainable growth rate. To calculate the sustainable growth rate, we first need to calculate the ROE, which is: ROE = NI / TE ROE = $7,722 / $48,000 ROE =.1609, or 16.09% Now we can use the sustainable growth rate equation to get: Sustainable growth rate = (ROE b) / [1 (ROE b)] Sustainable growth rate = [.1609(.70)] / [1.1609(.70)] Sustainable growth rate =.1269, or 12.69% So, the maximum dollar increase in sales is: Maximum increase in sales = $53,500(.1269) Maximum increase in sales = $6, Assuming costs vary with sales and a 20 percent increase in sales, the pro forma income statement will look like this: HEIR JORDAN CORPORATION Pro Forma Income Statement Sales $55,200 Costs 45,120 Taxable income $10,080 Taxes (35%) 3,528 Net income $6,552

5 The payout ratio is constant, so the dividends paid this year is the payout ratio from last year times net income, or: Dividends = ($2,400 / $5,460)($6,552) Dividends = $2,880 And the addition to retained earnings will be: Addition to retained earnings = $6,552 2,880 Addition to retained earnings = $3, Below is the balance sheet with the percentage of sales for each account on the balance sheet. Notes payable, total current liabilities, long-term debt, and all equity accounts do not vary directly with sales. HEIR JORDAN CORPORATION Balance Sheet ($) (%) ($) (%) Assets Liabilities and Owners Equity Current assets Current liabilities Cash $ 2, Accounts payable $ 2, Accounts receivable 4, Notes payable 5,400 n/a Inventory 6, Total $ 7,800 n/a Total $ 13, Long-term debt 28,000 n/a Fixed assets Owners equity Net plant and Common stock and equipment 41, paid-in surplus $ 15,000 n/a Retained earnings 3,950 n/a Total $ 18,950 n/a Total liabilities and owners Total assets $ 54, equity $ 54,750 n/a

CHAPTER 3 LONG-TERM FINANCIAL PLANNING AND GROWTH

CHAPTER 3 LONG-TERM FINANCIAL PLANNING AND GROWTH Answers to Concepts Review and Critical Thinking Questions 5. The sustainable growth rate is greater than 20 percent, because at a 20 percent growth rate