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Unformatted text preview: : Assets Debt × ΔSales – × ΔSales – (PM × Projected sales) × (1 – d) EFN = Sales Sales where: Assets/Sales = $24,800,000/$30,400,000 = 0.82 ΔSales = Current sales × Sales growth rate = $30,400,000(.20) = $6,080,000 Debt/Sales = $6,400,000/$30,400,000 = .2105 p = Net income/Sales = $2,392,000/$30,400,000 = .0787 Projected sales = Current sales × (1 + Sales growth rate) = $30,400,000(1 + .20) = $36,480,000 d = Dividends/Net income = $956,800/$2,392,000 = .40 so: EFN = (.82 × $6,080,000) – (.2105 × $6,080,000) – (.0787 × $36,480,000) × (1 – .40) EFN = $1,957,760 28 b. The current assets, fixed assets, and shortterm debt will all increase at the same percentage as sales. The longterm 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($36,480,000) Net income = $2,870,400 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(1 – d) Addition to retained earnings = $2,870,400(1 – .40) Addition to retained earnings = $1,722,240 So, the new accumulated retained earnings will be: Accumulated retained earnings = $10,400,000 + 1,722,240 Accumulated retained earnings = $12,122,240 The pro forma balance sheet will be: Assets Current assets Liabilities and equity Shortterm debt Longterm debt Common stock Accumulated retained earnings Total equity Total liabilities and equity $8,640,000 $7,680,000 $4,800,000 $3,200,000 12,122,240 $15,322,240 $27,802,240 Fixed assets 21,120,000 Total assets The EFN is: $29,760,000 EFN = Total assets – Total liabilities and equity EFN = $29,760,000 – 27,802,240 EFN = $1,957,760 29 c. The sustainable growth is: Sustainable growth rate = where: ROE = Net income/Total equity = $2,392,000/$13,600,000 = .1759 b = Retention ratio = Retained earnings/Net income = $1,435,200/$2,392,000 = .60 So: .1759 × .60 1  .1759 × .60 Sustainable growth rate = .1180 or 11.80% Sustainable growth rate = ROE × b 1  ROE × b 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 $809,600. Assets Current assets Liabilities and equity Shortterm debt Longterm debt Common stock Accumulated retained earnings Total equity Total liabilities and equity $8,640,000 $7,680,000 $4,800,000 $3,200,000 13,270,400 $16,470,400 $28,950,400 Fixed assets 21,120,000 Total assets The EFN is: $29,760,000 EFN = Total assets – Total liabilities and equity EFN = $29,760,000 – 28,950,400 EFN = $809,600 The company does have several alternatives. It can increase its asset utilization and/or its profit margin. The company could also increase the debt in its capital structure. This will decrease the equity account, thereby increasing ROE. 14. This is a multistep problem involving several ratios. It is often easier to look backward to determine where to start. We need receivables turnover to find days’ sales in receivables. To calculate receivables turnover, we need credit sales, and to find credit sales, we need total sales. Since we are given the profit margin and net income, we can use these to calculate total sales as: PM = 0.093 = NI / Sales = $205,000 / Sales; Sales = $2,204,301 Credit sales are 80 percent of total sales, so: Credit sales = $2,204,301(0.80) = $1,763,441 30 Now we can find receivables turnover by: Receivables turnover = Credit sales / Accounts receivable = $1,763,441 / $162,500 = 10.85 times Days’ sales in receivables = 365 days / Receivables turnover = 365 / 10.85 = 33.63 days 15. The solution to this problem requires a number of steps. First, remember that CA + NFA = TA. So, if we find the CA and the TA, we can solve for NFA. Using the numbers given for the current ratio and the current liabilities, we solve for CA: CR = CA / CL CA = CR(CL) = 1.30($900) = $1,170 To find the total assets, we must first find the total debt and equity from the information given. So, we find the net income using the profit margin: PM = NI / Sales NI = Profit margin × Sales = .094($5,320) = $500.08 We now use the net income figure as an input into ROE to find the total equity: ROE = NI / TE TE = NI / ROE = $500.08 / .182 = $2,747.69 Next, we need to find the longterm debt. The longterm debt ratio is: Longterm debt ratio = 0.40 = LTD / (LTD + TE) Inverting both sides gives: 1 / 0.40 = (LTD + TE) / LTD = 1 + (TE / LTD) Substituting the total equity into the equation and solving for longterm debt gives the following: 1 + $2,747.69 / LTD = 2.5 LTD = $2,747.69 / 1.5 = $1,831.79 Now, we can find the total debt of the company: TD = CL + LTD = $900 + 1,831.79 = $2,731.79 And, with the total debt, we can find the TD&E, which is equal to TA: TA = TD + TE = $2,731.79 + 2,747.69...
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This note was uploaded on 07/10/2010 for the course FIN 6301 taught by Professor Eshmalwi during the Spring '10 term at University of TexasTyler.
 Spring '10
 eshmalwi
 Finance, Corporate Finance

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