RWJ HW C4 - 2b54b868967409e3d576aab89779c7af9ee31901.doc 2....

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2b54b868967409e3d576aab89779c7af9ee31901.doc 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: Pro forma income statement Pro forma balance sheet Sales $ 20,090 Assets $ 10,890 Debt $ 5,100 Costs 14,850 Equity 7,825 Net income $ 6,050 Total $ 10,890 Total $ 12,925 Dividends $ 3,025 Add. to RE 3,025 Note that the balance sheet does not balance. This is due to EFN. The EFN for this company is: EFN = Total assets – Total liabilities and equity EFN = $10,890 – 12,925 EFN = –$2,035 5. Assuming costs and assets increase proportionally, the pro forma financial statements will look like this: Pro forma income statement Pro forma balance sheet Sales $ 3,910.00 CA $ 5,060.00 CL $ 1,012.00 Costs 3,220.00 FA 6,555.00 LTD 3,580.00 Taxable income 690.00 Equity 5,867.70 Taxes (34%) 234.60 Total $11,615.00 Total $10,459.70 Net income $ 455.40 CHAPTER 4 B-33 The payout ratio is 50 percent, so dividends will be: Dividends = 0.50($455.40) Dividends = $227.70 The addition to retained earnings is: Addition to retained earnings = $455.40 – 227.70 Addition to retained earnings = $227.70 So the EFN is: EFN = Total assets – Total liabilities and equity EFN = $11,615.00 – 10,459.70 EFN = $1,155.30 (10100/3400)*510-(880/3400)*510-(455/3910)3910 (0.5) 12. We need to calculate the retention ratio to calculate the internal growth rate. The retention ratio is: b = 1 – .15 b = .85 Now we can use the internal growth rate equation to get: Internal growth rate = (ROA × b) / [1 – (ROA × b)] Internal growth rate = [.09(.85)] / [1 – .09(.85)] Internal growth rate = .0828 or 8.28% Lee Bertrand Page 1 5/12/2009
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2b54b868967409e3d576aab89779c7af9ee31901.doc 16. To determine full capacity sales, we divide the current sales by the capacity the company is currently using, so: Full capacity sales = $610,000 / .90 Full capacity sales = $677,778
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RWJ HW C4 - 2b54b868967409e3d576aab89779c7af9ee31901.doc 2....

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