COMPUTERFIELD CORPORATION has the following financial statements for fiscal year

Question

COMPUTERFIELD CORPORATION has the following financial statements for fiscal year 2017. The firm forecasts 20% sales growth next year and every tem will grow accordingly. EXCEPT that the debt will stay unchanged 2. 1) Is this growth feasible without external financing? If not, how much external financing is needed? 2) All conditions same, what growth rate can the firm achieve in 2018 without the external financing you just computed? In both 1) and 2), assume that firm pays NO dividend 3) Re-do 2) if in 2018. dividend payout will be 30% of the Net Income. (bonus practice. actually you just need to slightly adjust your equation when dividend payout comes into play) COMPUTERFIELD CORPORATION Financial Statements Income Statement 2017 Balance Sheet 12/31/2017 Sales Costs Taxable income Taxes (20%) Net income $1.000 Assets $3,000 Deb $1,500 Equity 1500 $160 Tota $3,000 Total $3,000 800 200 40 Sales growth for 2018is3 Sale-S 1 .000 * 130%-| 300 Cost $800* 1 30%-$ 1 ,040 Taxable income = 1300-960=$260 Tax-$260 * 30%-$78 Net Income-5260-$78=$182

Explanation / Answer

1 The growth is not feasible without external financing, external financing required would be as follows Income Statement 2018 Balance Sheet Sales $1,200 1000*120% Assets 3600 Debt $1,500 Cost 960 0.8 Taxable Income 240 Equity 1692 Taxes @ 20% 48 Net Income 192 3600 3192 Addition To Retained Earnings $192 External Financing needed - 3600-3192 $408 2 Internal Growth Rate - Net Income/Total assets 192/3000 6.40% Income Statement 2018 Balance Sheet Sales $1,064 1000*1.064 Assets 3192 Debt $1,500 Cost 851.2 0.8 Taxable Income 212.8 Equity 1670 Taxes @ 20% 42.56 Net Income 170.24 3192 3170 Addition To Retained Earnings $170 With growth rate of 6.40%, the company will not require external financing 3 Growth Rate - Net income ater dividend/Assets (192*70%)/3000 134.4 0.0448 1 1.0448 Income Statement 2018 Balance Sheet Sales $1,045 1000*1.0448 Assets 3134.4 Debt $1,500 Cost 835.84 0.8 Taxable Income 208.96 Equity 1617 Taxes @ 20% 41.792 Net Income 167.168 3134.4 3117 Dividends 50.1504 Addition To Retained Earnings $117 The growth rate would be approx 4.48%

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