21 we can also calculate the ratio of the addition to

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Unformatted text preview: was: Dividend payout ratio Cash dividends Net income $44 132 33 1 3% [3.21] We can also calculate the ratio of the addition to retained earnings to net income as: Addition to retained earnings Net income $88 132 66 2 3% This ratio is called the retention ratio or plowback ratio, and it is equal to 1 minus the dividend payout ratio because everything not paid out is retained. Assuming that the payout ratio is constant, the projected dividends and addition to retained earnings will be: Projected dividends paid to shareholders Projected addition to retained earnings $165 $165 13 23 $ 55 110 $165 THE BALANCE SHEET To generate a pro forma balance sheet, we start with the most recent statement, as shown in Table 3.12. On our balance sheet, we assume that some of the items vary directly with sales and others do not. For those items that do vary with sales, we express each as a percentage of sales for the year just completed. When an item does not vary directly with sales, we write “n/a” for “not applicable.” For example, on the asset side, inventory is equal to 60 percent of sales ($600/1,000) for the year just ended. We assume this percentage applies to the coming year, so for each $1 increase in sales, inventory will rise by $.60. More generally, the ratio of total assets to sales for the year just ended is $3,000/1,000 3, or 300 percent. This ratio of total assets to sales is sometimes called the capital intensity ratio. It tells us the amount of assets needed to generate $1 in sales; so the higher the ratio is, the more capital intensive is the firm. Notice also that this ratio is just the reciprocal of the total asset turnover ratio we defined previously. For Rosengarten, assuming that this ratio is constant, it takes $3 in total assets to generate $1 in sales (apparently Rosengarten is in a relatively capital intensive business). 68 PART 1 Overview ros82361_ch03.indd 68 5/27/08 10:15:07 AM Confirming Pages TABLE 3 .1 2 R O S E N G A R T E N C O R P O R AT I O N Balance Sheet Assets $ Current assets Cash Accounts receivable Inventory Total Fixed assets Net plant and equipment PERCENTAGE OF SALES Current liabilities Accounts payable Notes payable Total Long-term debt Owners’ equity Common stock and paid-in surplus Retained earnings Total Total liabilities and owners’ equity Liabilities and Owners’ Equity $ PERCENTAGE OF SALES $ 160 440 600 $1,200 16% 44 60 120 $ 300 100 $ 400 $ 800 30% n/a n/a n/a $1,800 180 $ 800 1,000 $1,800 $3,000 n/a n/a n/a n/a Total assets $3,000 300% Therefore, if sales are to increase by $100, then Rosengarten will have to increase total assets by three times this amount, or $300. On the liability side of the balance sheet, we show accounts payable varying with sales. The reason is that we expect to place more orders with our suppliers as sales volume increases, so payables will change “spontaneously” with sales. Notes payable, on the other hand, represents short-term debt such as bank borrowing. This will not vary unl...
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This note was uploaded on 10/28/2009 for the course FINA 505 taught by Professor Deborahcernauskas during the Summer '09 term at Northern Illinois University.

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