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4.1We can calculate EFN by preparing the pro forma statements using the percent-age of sales approach. Note that sales are forecasted to be $4,250 1.10 $4,675.4.2Full-capacity sales are equal to current sales divided by the capacity utilization.At 60 percent of capacity:$4,250 .60 Full-capacity sales$7,083Full-capacity salesWith a sales level of $4,675, no net new fixed assets will be needed, so our ear-lier estimate is too high. We estimated an increase in fixed assets of $2,4202,200 $220. The new EFN will thus be $78.7220 2$141.3, a surplus. Noexternal financing is needed in this case.At 95 percent capacity, full-capacity sales are $4,474. The ratio of fixed as-sets to full-capacity sales is thus $2,200/4,474 49.17%. At a sales level of$4,675, we will thus need $4,675 .4917 $2,298.7in net fixed assets, an in-crease of $98.7. This is $22098.7 $121.3less than we originally predicted,so the EFN is now $78.7121.3 2$42.6, a surplus. No additional financingis needed.Answers to Chapter Review and Self-Test ProblemsSKANDIA MINING COMPANYPro Forma Financial StatementsIncome StatementSales$4,675.0ForecastCosts4,262.791.18% of salesTaxable income$412.3Taxes (34%)140.2Net income$272.1Dividends$90.833.37%of net incomeAddition to retained earnings181.3Balance SheetAssetsLiabilities and Owners’ EquityCurrent assets$990.021.18%Net fixed assets2,420.051.76%Total assets$3,410.072.94%Current liabilities$55011.76%Long-term debt1,800.0n/aOwners’ equity981.3n/aTotal liabilities and owners’ equity $3,331.3n/aEFN$78.7n/a
4.3Skandia retains b1.3337 66.63% of net income. Return on assets is$247.5/3,100 7.98%. The internal growth rate is:5.62%Return on equity for Skandia is $247.5/800 30.94%, so we can calculate thesustainable growth rate as:25.97%1.Sales ForecastWhy do you think most long-term financial planning beginswith sales forecasts? Put differently, why are future sales the key input?2.Long Range Financial PlanningWould long-range financial planning bemore important for a capital intensive company, such as a heavy equipmentmanufacturer, or an import-export business? Why?3.External Financing NeededTestaburger, Inc., uses no external financing andmaintains a positive retention ratio. When sales grow by 15 percent, the firm hasa negative projected EFN. What does this tell you about the firm’s internalgrowth rate? How about the sustainable growth rate? At this same level of salesgrowth, what will happen to the projected EFN if the retention ratio is increased?What if the retention ratio is decreased? What happens to the projected EFN ifthe firm pays out all of its earnings in the form of dividends?4.EFN and Growth RatesBroslofski Co. maintains a positive retention ratioand keeps its debt-equity ratio constant every year. When sales grow by 20 per-cent, the firm has a negative projected EFN. What does this tell you about thefirm’s sustainable growth rate? Do you know, with certainty, if the internalgrowth rate is greater than or less than 20 percent? Why? What happens to theprojected EFN if the retention ratio is increased? What if the retention ratio isdecreased? What if the retention ratio is zero?