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Unformatted text preview: From Chapter 3 (page 86.10), we learned: RE = Net Profit - Cash Dividends (Preferred & Common) When using the Incremental Algebraic Approach, this equation expands to: Projected RE = St (1 + g) ( ) NI Div 1 t +1 t + 1 S NI t +1 t + 1 = (S t+1) (NPM) (1 Dividend Payout Ratio) = (S t+1) (NPM) (1 b) = (S t+1) (NPM) (Retention Ratio) Method 2: Incremental Algebraic Approach
Projected Assets Projected Spontaneous liabilities Projected RE EFN = Therefore, EFN is equal to: A t S t SL S - t S t S - S (1 + g) t ( ) NI Div 1 t +1 t + 1 S NI t +1 t + 1 Total Financing provided Projected Net Profit Retention Financing by an increase in Sales Margin Ratio Needs1 Spontaneous Liabilities Financing provided by an increase in Retained Earnings A = Assets S (t) = Past Year's Sales S (t+1) = Projected Sales SL = Spontaneous Liabilities
1 This first term only includes assets that change in proportion to changes in sales. If there are other assets that do not increase proportionately with sales, for example fixed assets, you must add them here. g = Growth Rate NI (t+1) = Projected Net Income Div (t+1) = Projected Dividends ...
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- Spring '08