Calculate the external financing needed for next year. (Do not round intermediat

Question

  

  

  

Calculate the external financing needed for next year. (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)

  

  

Prepare the firm’s pro forma balance sheet for next year. (Do not round intermediate calculations and round your answers to the nearest whole number, e.g., 32.)

  

Calculate the external financing needed. (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)

  

  

Calculate the sustainable growth rate for the company based on the current financial statements. (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

  

The Optical Scam Company has forecast a sales growth rate of 25 percent for next year. The current financial statements are shown here:

Explanation / Answer

Answer a The formula to calculate the External Financing needed (EFN) is as under, EFN = Increase in assets - Increase in Liabilities - Increase in Retained Earnings Increase in assets = Current year Total assets * Sales Growth rate = $24,569,000 * 25% = $61,42,250 Increase in Liabilities = Current year short term debt * Sales Growth rate = $62,20,000 * 25% = $15,55,000 Increase in retained Earnings = Current year sales × (1 + sales growth rate) × profit margin × retention rate Increase in retained Earnings = $3,11,00,000 x (1+0.25) x 9.86% x 60% = $22,99,879 EFN = $61,42,250 - $15,55,000 - $22,99,879 External Financing Needed = $22,87,371 Working Current year retention rate = Addition to retained earnings / Net income = $1839903 / $3066505 = 60% Current year profit margin = Net Income / Sales = $30,66,505 / $3,11,00,000 = 9.86% Answer b Firm's Proforma Balance Sheet for next year Balance Sheet Assets Liabilities and Equity Current assets $9,087,500.00 Short term debt $7,775,000.00 Fixed assets $21,623,750.00 Long term debt $6,641,371.00 Common stock $2,516,000.00 Accumulated retained earnings $13,778,879.00 Total Equity $16,294,879.00 Total assets $30,711,250.00 Total Liabilities and Equity $30,711,250.00 Answer c Sustainable growth rate is the maximum growth rate that a company can achieve using its retained earnings while also maintaining its capital structure. The formula to calculate SGR is as under, SGR = ROE x Retention ratio ROE i.e. return on equity = Net Income / Equity = $30,66,505 / $13,995,000 = 21.91% Current year retention rate = Addition to retained earnings / Net income = $1839903 / $3066505 = 60% SGR = 21.91% * 60% The sustainable growth rate for the company based on the current financial statements = 13.15%

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