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Unformatted text preview: uity = $7,800 + 2,200 Equity = $10,000 So the EFN is: EFN = Total assets – Total liabilities and equity EFN = $16,497 – 16,300 = $197 9. a. First, we need to calculate the current sales and change in sales. The current sales are next year’s sales divided by one plus the growth rate, so: Current sales = Next year’s sales / (1 + g) Current sales = $390,000,000 / (1 + .10) Current sales = $354,545,455 And the change in sales is: Change in sales = $390,000,000 – 354,545,455 Change in sales = $35,454,545 25 We can now complete the current balance sheet. The current assets, fixed assets, and shortterm debt are calculated as a percentage of current sales. The longterm debt and par value of stock are given. The plug variable is the additions to retained earnings. So: Assets Current assets Liabilities and equity Shortterm debt Longterm debt Common stock Accumulated retained earnings Total equity Total liabilities and equity $70,909,091 $53,181,818 $130,000,000 $48,000,000 265,181,818 $313,181,818 $496,363,636 Fixed assets 425,454,545 Total assets b. $496,363,636 We can use the equation from the text to answer this question. The assets/sales and debt/sales are the percentages given in the problem, so: Assets Debt × ΔSales – × ΔSales – (PM × Projected sales) × (1 – d) EFN = Sales Sales EFN = (.20 + 1.20) × $35,454,545 – (.15 × $35,454,545) – [(.12 × $390,000,000) × (1 – .30)] EFN = $11,558,182 c. 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 = .12($390,000,000) Net income = $46,800,000 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(1 – d) Addition to retained earnings = $46,800,000(1 – .30) Addition to retained earnings = $32,760,000 So, the new accumulated retained earnings will be: Accumulated retained earnings = $265,181,818 + 32,760,000 Accumulated retained earnings = $297,941,818 26 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 $78,000,000 $58,500,000 $130,000,000 $48,000,000 297,941,818 $345,941,818 $534,441,818 Fixed assets $468,000,000 Total assets The EFN is: $546,000,000 EFN = Total assets – Total liabilities and equity EFN = $546,000,000 – 534,441,818 EFN = $11,558,182 10. a. The sustainable growth is: Sustainable growth rate = where: b = Retention ratio = 1 – Payout ratio = .60 So: Sustainable growth rate = .1050 × .60 1  .1050 × .60 ROE × b 1  ROE × b Sustainable growth rate = .0672 or 6.72% b. It is possible for the sustainable growth rate and the actual growth rate to differ. If any of the actual parameters in the sustainable growth rate equation differs from those used to compute the sustainable growth rate, the actual growth rate will differ from the sustainable growth rate. Since the sustainable growth rate includes ROE in the calculation, this also implies that changes in the profit margin, total asset turnover, or equity multiplier will affect the sustainable growth rate. The company can increase its growth rate by doing any of the following: Increase the debttoequity ratio by selling more debt or repurchasing stock Increase the profit margin, most likely by better controlling costs. Decrease its total assets/sales ratio; in other words, utilize its assets more efficiently. Reduce the dividend payout ratio. c. 27 Intermediate 11. The solution requires substituting two ratios into a third ratio. Rearranging D/TA: Firm A D / TA = .40 (TA – E) / TA = .40 (TA / TA) – (E / TA) = .40 1 – (E / TA) = .40 E / TA = .60 E = .60(TA) Rearranging ROA, we find: NI / TA = .12 NI = .12(TA) NI / TA = .15 NI = .15(TA) Firm B D / TA = .30 (TA – E) / TA = .30 (TA / TA) – (E / TA) = .30 1 – (E / TA) = .30 E / TA = .70 E = .70(TA) Since ROE = NI / E, we can substitute the above equations into the ROE formula, which yields: ROE = .12(TA) / .60(TA) = .12/.60 = 20% ROE = .15(TA) / .70 (TA) = .30/.60 = 21.43% 12. PM = NI / S = –£15,834 / £167,983 = –.0943 or 9.43% As long as both net income and sales are measured in the same currency, there is no problem; in fact, except for some market value ratios like EPS and BVPS, none of the financial ratios discussed in the text are measured in terms of currency. This is one reason why financial ratio analysis is widely used in international finance to compare the business operations of firms and/or divisions across national economic borders. The net income in dollars is: NI = PM × Sales NI = –0.0943($251,257) = –$23,683.37 13. a. The equation for external funds needed is...
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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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