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**Unformatted text preview: **FIN2704 Tutorial 9
Group 9
Garreth Lee
Georgi Goh
Jamie Lee #1
The most recent financial statements for Summer Tyme, Inc., are shown here: Assets, costs and current liabilities are proportional to sales. Long-term debt and equity are not. The
company maintains a constant 40% dividend payout ratio. As with every other firm in its industry, next
year’s sales are projected to increase by exactly 15%. What is the external financing needed? #1
Income Statement Pro-Forma Income Statement Sales $4,200 Sales $4,830 Costs 3,300 Costs 3,795 Taxable Income 900 Taxable Income 1,035 Taxes (34%) 306 Taxes (34%) 352 Net Income $594 Net Income 683 Dividends (40%) 273 Change in RE $410 #1
Balance Sheet Pro-Forma Balance Sheet
% of
Sales % of
Sales Current
Assets $3,600 86% Current
Liabilities $2,100 Fixed
Assets 7,900 188 Long-term
debt 3,650 Equity 5,750 Total L & OE $11,500 Total
Assets $11,500 274 50% % of
Sales % of
Sales Current
Assets $4,140 86% Current
Liabilities $2,415 Fixed
Assets 9,085 188 Long-term
debt 3,650 Equity 6,160 Total L & OE $12,225 Total
Assets External financing needed = $13,225 - $12,224 = $1,000.14 $13,225 274 50% #2
The most recent financial statements for Live Co. are shown here: Assets and costs are proportional to sales. Debt and equity are not. The company maintains a constant
30 percent dividend payout ratio. No external equity financing is possible. What is the internal growth
rate? #2
Internal Growth Rate = ROA x b / [1 - (ROA x b)]
ROA = Net Income / Total Assets
= 2,262 / 39,150
= 0.0578
b = (Net Income - Dividends) / Net Income
= 2,262 - 0.3(2,262) / 2,262
= 0.7
Internal Growth Rate = 0.0578 x 0.7 / [1 - (0.0578 x 0.7)
= 4.21% #3
For the company in the previous problem, what is the sustainable growth rate?
Sustainable Growth Rate = ROE x b / [1 - (ROE x b)]
ROE = Net Income / Total Equity
= 2,262 / 21,650
= 0.1045
b = 0.7 (from Q2)
Sustainable Growth Rate = 0.1045 x 0.7 / [1 - (0.1045 x 0.7)
= 7.89% #4
McCormac Co. wishes to maintain a growth rate 12 percent a year, a debt-equity ratio of 1.20, and a
dividend payout ratio of 30 percent. The ratio of total assets to sales is constant at 0.75. What profit
margin must the firm achieve?
Dupont Identity:
ROE = Profit margin * Total Asset Turnover * Equity multiplier
Sustainable Growth Rate = ROE x b / [1 - (ROE x b)]
Total Asset Turnover = 1 / Total assets to sales ratio
Equity multiplier = 1 + Debt-equity ratio #4
McCormac Co. wishes to maintain a growth rate 12 percent a year, a debt-equity ratio of 1.20, and a
dividend payout ratio of 30 percent. The ratio of total assets to sales is constant at 0.75. What profit
margin must the firm achieve?
Sustainable Growth Rate = ROE x b / [1 - (ROE x b)]
b = 1 - 0.3 = 0.7
0.12 = ROE x 0.7 / [(1 - (ROE x 0.7)]
0.12 - 0.084ROE = 0.7ROE
0.784ROE = 0.12
ROE = 0.1531 #4
McCormac Co. wishes to maintain a growth rate 12 percent a year, a debt-equity ratio of 1.20, and a
dividend payout ratio of 30 percent. The ratio of total assets to sales is constant at 0.75. What profit
margin must the firm achieve?
Total Asset Turnover = 1 / Total assets to sales ratio
= 1 / 0.75
= 1.33
Equity multiplier = 1 + Debt-equity ratio
= 1 + 1.20
= 2.20 #4
McCormac Co. wishes to maintain a growth rate 12 percent a year, a debt-equity ratio of 1.20, and a
dividend payout ratio of 30 percent. The ratio of total assets to sales is constant at 0.75. What profit
margin must the firm achieve?
ROE = Profit margin * Total Asset Turnover * Equity multiplier
0.1531 = Profit margin * 1.33 * 2.20
Profit margin = 5.22% #5
You’ve collected the following information about St. Pierre, Inc,: Sales = $195,000
Net income = $17,500
Dividends = $9,300
Total debt = $86,000
Total equity = $58,000
What is the sustainable growth rate for St. Pierre, Inc.? If it does grow at this rate, how much new
borrowing will take place in the coming year, assuming a constant debt-equity ratio? What growth rate
could be supported with no outside financing at all? #5
What is the sustainable growth rate for St. Pierre, Inc.? Sales = $195,000
Net income = $17,500
Dividends = $9,300
Total debt = $86,000
Total equity = $58,000 Sustainable Growth Rate = ROE x b / [1 - (ROE x b)]
b = (Net Income - Dividends) / Net Income
= (17,500 - 9,300) / 17,500
= 0.4686
ROE = Net Income / Equity
= 17,500 / 58,000
= 0.3017
Sustainable Growth Rate = 0.3017 x 0.4686 / [1 - (0.3017 x 0.4686)]
= 16.5% #5
How much new borrowing will take place in the coming year, assuming a constant debt-equity ratio? Sales = $195,000
Net income = $17,500
Dividends = $9,300
Total debt = $86,000
Total equity = $58,000 Profit Margin = Net Income / Sales
= 17,500 / 195,000
= 0.08974
New Sales = 195,000 * 1.165
= $227,108.43
Net Income = 0.08974 * 227,108.43
= $20,381.53
Dividends = (9300/17500) * 20,381.53
= $10,831.33 #5
How much new borrowing will take place in the coming year, assuming a constant debt-equity ratio? Sales = $195,000
Net income = $17,500
Dividends = $9,300
Total debt = $86,000
Total equity = $58,000 Total Assets = (86,000+58,000)*1.165 = $167,710.84
Total Liabilities = $86,000
Total Equity = 58,000 + 20,381.53 - 10,831.33
= $67550.20
Total Debt and Equity = 86,000 + 67550.20
= $153,550.20
New Borrowing required = 167710.8 - 153550.20
= $14,160.64 #5
What growth rate could be supported with no outside financing at all? Sales = $195,000
Net income = $17,500
Dividends = $9,300
Total debt = $86,000
Total equity = $58,000 For no outside financing, we find Internal Growth Rate
Internal Growth Rate = ROA x b / [1 - (ROA x b)]
ROA = Net Income / Assets
= 17,500 / 144,000
= 0.1215
b = 0.4686 (From earlier part)
Internal Growth Rate = 0.1215 x 0.4686 / [1 - (0.1215*0.4686)]
= 6.04% #6
U-Dunno Corporation's Balance Sheet and Income Statement are as shown below. Note that the firm
maintains a cash balance as required for its operations (none of its cash is ‘excess cash’):
U-Dunno Corporation
2012 and 2013 Balance Sheet #6
U-Dunno Corporation's Balance Sheet and Income Statement are as shown below. Note that the firm
maintains a cash balance as required for its operations (none of its cash is ‘excess cash’):
U-Dunno Corporation
2013 Income Statement #6
a. Assume that all assumptions for application of the AFN Equation hold (as discussed in your course
notes, i.e. the firm is operating at full capacity, it maintains the same operating relationships, payout
ratios, etc.). What is U-Dunno Corporation’s AFN given a desired increase in Sales to $1,800,000 for
2014?
% Increase in Sales in 2014 = 1,800,000 / 1,600,000 - 1
= 12.5% A* = $1,250,000
Initial Sales = $1,600,000
Change in Sales = $200,000
L* = $130,000
M = 144,000/1,600,000 = 0.09
RR = 1 - [(402,000-330,000) / 144,000] = 0.5
AFN = (1,250,000/1,600,000)*(200,000) - (130,000/1,600,000)*(200,000) - (0.09)(1,800,000)(0.5)
= $59,000 #6
b. If Fixed Assets had only been operating at 80% of capacity in 2013, would additional Fixed Assets
still be required given desired sales of $1,800,000 for 2014? If not, what would be the resultant AFN
required as per the AFN Equation (as covered in your notes)?
100% Capacity Sales = 1,600,000/0.8
= $2,000,000
Estimated Sales = $1,800,000
Operating Capacity = 1,800,000/2,000,000 = 90% < 100%
Hence, no additional Fixed Assets required
Since no additional Fixed Assets required, AFN falls by 12.5% (growth rate) of 2013 Fixed Assets
New AFN = 59,000 - 0.125*450,000 = $2,750 #6
c. Given that Fixed Assets had only been operating at 80% of capacity in 2013, if desired Sales
increased to $2,200,000 for 2014 instead, what would be the increase in Fixed Asset requirement?
Incremental Sales above 100% capacity = 2,200,000 - 2,000,000 = $200,000
Target Ratio = FA / Capacity Sales
= 450,000 / 2,000,000
= 0.225
Additional FA needed for incremental sales of $200,000:
Change in FA = 0.225*200,000 = $45,000 ...

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- Fall '19
- Balance Sheet, Generally Accepted Accounting Principles