exo1fc - Econ 333 FINANCIAL ECONOMICS SPRING 08 Lecturer:...

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Econ 333 – FINANCIAL ECONOMICS SPRING 08 Lecturer: Flaubert Mbiekop PROBLEM SET #1: Financial Statement Analysis - long term planning - Valuation ANSWER KEY Question 1 : #13 p 82 a. The equation for external funds needed is: EFN = (Sales/Assets) × Sales – (Debt/Sales) Sales – (PM × Projected sales) × (1 – d ) where: Assets/Sales = $31,000,000/$38,000,000 = 0.82 Sales = Current sales × Sales growth rate = $38,000,000(.20) = $7,600,000 Debt/Sales = $8,000,000/$38,000,000 = .2105 p = Net income/Sales = $2,990,000/$38,000,000 = .0787 Projected sales = Current sales × (1 + Sales growth rate) = $38,000,000(1 + .20) = $45,600,000 d = Dividends/Net income = $1,196,000/$2,990,000 = .40 so: EFN = (.82 × $7,600,000) – (.2105 × $7,600,000) – (.0787 × $45,600,000) × (1 – .40) EFN = $2,447,200 b. The current assets, fixed assets, and short-term debt will all increase at the same percentage as sales. The long-term debt and common stock will remain constant. The accumulated retained earnings will increase by the addition to retained earnings for the year. We can calculate the addition to retained earnings for the year as: Net income = Profit margin × Sales Net income = .0787($45,600,000) Net income = $3,588,000 The addition to retained earnings for the year will be the net income times one minus the dividend payout ratio, which is: Addition to retained earnings = Net income x (1 – d ) Addition to retained earnings = $3,588,000(1 – .40) Addition to retained earnings = $2,152,800
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Accumulated retained earnings = $13,000,000 + 2,152,800 Accumulated retained earnings = $15,152,800 The pro forma balance sheet will be: The EFN is: EFN = Total assets – Total liabilities and equity EFN = $37,200,000 – 34,752,800 EFN = $2,447,200 c . The sustainable growth is: Sustainable growth rate = (ROE x b)/(1-ROE x b) where: ROE = Net income/Total equity = $2,990,000/$17,000,000 = .1759 b = Retention ratio = Retained earnings/Net income = $1,794,000/$2,990,000 = .60 So: Sustainable growth rate =.1759 x .60 / 1- .60 x.1759) Sustainable growth rate = .1180 or 11.80% d . The company cannot just cut its dividends to achieve the forecast growth rate. As shown below, even with a zero dividend policy, the EFN will still be $1,012,000. The EFN is:
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exo1fc - Econ 333 FINANCIAL ECONOMICS SPRING 08 Lecturer:...

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