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CHAPTER 4 B-53 Sales growth rate = 35% and debt/equity ratio = .75255: MOOSE TOURS INC. Pro Forma Balance Sheet Assets Liabilities and Owners’ Equity Current assets Current liabilities Cash \$ 34,155 Accounts payable \$ 91,800 Accounts receivable 54,945 Notes payable 17,000 Inventory 117,315 Total \$ 108,800 Total \$ 206,415 Long-term debt \$ 215,848 Fixed assets Net plant and Owners’ equity equipment 557,550 Common stock and paid-in surplus \$ 140,000 Retained earnings 291,395 Total \$ 431,395 Total liabilities and owners’ Total assets \$ 763,965 equity \$ 756,043 So the excess debt raised is: Excess debt = \$756,043 – 763,965 Excess debt = –\$7,922 At a 35 percent growth rate, the firm will need funds in the amount of \$7,922 in addition to the external debt already raised. So, the EFN will be: EFN = \$57,848 + 7,922 EFN = \$65,770 30. We must need the ROE to calculate the sustainable growth rate. The ROE is: ROE = (PM)(TAT)(EM) ROE = (.067)(1 / 1.35)(1 + 0.30) ROE = .0645 or 6.45% Now we can use the sustainable growth rate equation to find the retention ratio as: Sustainable growth rate = (ROE × b) / [1 – (ROE × b)] Sustainable growth rate = .12 = [.0645(b)] / [1 – .0645(b) b = 1.66 This implies the payout ratio is: Payout ratio = 1 – b Payout ratio = 1 – 1.66 Payout ratio = –0.66

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