The Optical Scam Company has forecast a sales growth rate of 20 percent for next

Question

The Optical Scam Company has forecast a sales growth rate of 20 percent for next year. Current assets, fixed assets, and short-term debt are proportional to sales. The current financial statements are shown here:
  

  

  
a. Calculate the external funds needed for next year using the equation from the chapter. (Do not round intermediate calculations.)
  
External financing needed           $   
  
b-1. Prepare the firm’s pro forma balance sheet for next year. (Do not round intermediate calculations.)
   

b-2. Calculate the external funds needed. (Do not round intermediate calculations.)
  
External financing needed           $  

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

INCOME STATEMENT Sales $ 32,200,000 Costs 27,743,800 Taxable income $ 4,456,200 Taxes 1,559,670 Net income $ 2,896,530 Dividends $ 1,158,612 Addition to retained earnings 1,737,918

Explanation / Answer

The Equation of External financing needed is EFN = (Assets/Sales)*Change in Sales - (Debt/Sales)*Change in Sales - (PM*Projected Sales)*(1-d) Increase in Sales $32200000*20% 6440000 PM = Net Income/Sales (2896530/32200000) 0.089954348 d = Dividend payout ratio 1158612/2896530 0.40 EFN = (25438000/32200000)*6440000 - (7084000/32200000)*6440000 - (0.089954*38640000)*(1-0.40) EFN = 5087600 - 1416800 - 2085502 EFN 1585298 Projected Net Income INCOME STATEMENT Sales 38640000 (32200000+6440000) Costs 33292560 (27743800/32200000)*38640000 Taxable Income 5347440 Taxes @ 35% 1871604 (1559670/4456200) 0.35 Net Income 3475836 Dividends 1390334 40% Addition to Retained Earnings 2085502 Projected retained earnings - 10004000 + 2085502 12089502 PRO FORMA BALANCE SHEET Assets Liabilities and Equity (7380000/32200000)*38640000 Current Assets $ 8856000 Short-Term Debt $ 8500800 (7084000/32200000)*38640000 Long Term debt $ 4958800 (18058000/32200000)*38640000 Fixed Assets $ 21669600 Common Stock $ 3391200 Accumulated retained earnings $ 12089502 Total Equity $ 15480702 Total Assets 30525600 Total Liabilities and Equity 28940302 External financing needed $1,585,298 Sustainable growth rate = (ROE*b)/(1-ROE*b) ROE = Net Income/Total Equity 2896530/13395200 21.62% b = 60% Sustainable growth rate = (0.2162*0.60)/(1-0.2162*0.60) 0.12972/0.87028 14.91%

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