41 We can calculate EFN by preparing the pro forma statements using the percent

41 we can calculate efn by preparing the pro forma

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4.1 We 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. 4.2 Full-capacity sales are equal to current sales divided by the capacity utilization. At 60 percent of capacity: $4,250 .60 Full-capacity sales $7,083 Full-capacity sales With 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 $2,420 2,200 $220 . The new EFN will thus be $78.7 220 2 $141.3 , a surplus. No external 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 $2,298.7 in net fixed assets, an in- crease of $98.7. This is $220 98.7 $121.3 less than we originally predicted, so the EFN is now $78.7 121.3 2 $42.6 , a surplus. No additional financing is needed. Answers to Chapter Review and Self-Test Problems SKANDIA MINING COMPANY Pro Forma Financial Statements Income Statement Sales $4,675.0 Forecast Costs 4,262.7 91.18% of sales Taxable income $ 412.3 Taxes (34%) 140.2 Net income $ 272.1 Dividends $ 90.8 33.37% of net income Addition to retained earnings 181.3 Balance Sheet Assets Liabilities and Owners’ Equity Current assets $ 990.0 21.18% Net fixed assets 2,420.0 51.76% Total assets $3,410.0 72.94% Current liabilities $ 550 11.76% Long-term debt 1,800.0 n/a Owners’ equity 981.3 n/a Total liabilities and owners’ equity $3,331.3 n/a EFN $ 78.7 n/a
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4.3 Skandia retains b 1 .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 the sustainable 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 Needed Testaburger, Inc., uses no external financing and maintains a positive retention ratio. When sales grow by 15 percent, the firm has a negative projected EFN. What does this tell you about the firm’s internal growth rate? How about the sustainable growth rate? At this same level of sales growth, 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 if the firm pays out all of its earnings in the form of dividends? 4. EFN and Growth Rates Broslofski Co. maintains a positive retention ratio and 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 the firm’s sustainable growth rate? Do you know, with certainty, if the internal growth rate is greater than or less than 20 percent? Why? What happens to the projected EFN if the retention ratio is increased? What if the retention ratio is decreased? What if the retention ratio is zero?
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