Addition to retained earnings 95732 The new retained earnings on the pro forma

Addition to retained earnings 95732 the new retained

This preview shows page 22 - 25 out of 32 pages.

Addition to retained earnings = $95,732 The new retained earnings on the pro forma balance sheet will be: New retained earnings = $182,900 + 95,732 New retained earnings = $3278,632 The pro forma balance sheet will look like this: 20% Sales Growth : HOPINGTON TOURS INC. Pro Forma Balance Sheet Assets Liabilities and Owners’ Equity Current assets Current liabilities Cash $ 30,360 Accounts payable $ 81,600 Accounts receivable 48,840 Notes payable 17,000 Inventory 104,280 Total $ 98,600 Total $ 183,480 Long-term debt 158,000 Fixed assets Net plant and Owners’ equity equipment 495,600 Common stock and paid-in surplus $ 140,000 Retained earnings 278,632 Total $ 418,632 Total liabilities and owners’ Total assets $ 679,080 equity $ 675,232 So the EFN is: EFN = Total assets – Total liabilities and equity EFN = $679,080 – 675,232 EFN = $3,848 At a 25 percent growth rate, and assuming the payout ratio is constant, the dividends paid will be: Dividends = (33,735/$112,450)($142,837.50)
Image of page 22
Dividends = $42,851.25 And the addition to retained earnings will be: Addition to retained earnings = $142,837.50 - $42,851.25 Addition to retained earnings = $99,986.25 The new retained earnings on the pro forma balance sheet will be: New retained earnings = $182,900 + 99,986.25 New retained earnings = $282,886.25 The pro forma balance sheet will look like this: 25% Sales Growth : HOPINGTON TOURS INC. Pro Forma Balance Sheet Assets Liabilities and Owners’ Equity Current assets Current liabilities Cash $ 31,625 Accounts payable $ 85,000 Accounts receivable 50,875 Notes payable 17,000 Inventory 108,625 Total $ 102,500 Total $ 191,125 Long-term debt 158,000 Fixed assets Net plant and Owners’ equity equipment 516,250 Common stock and paid-in surplus $ 140,000 Retained earnings 282,886.25 Total $ 422,886.25 Total liabilities and owners’ Total assets $ 707,375 equity $ 682,886.25 So the EFN is: EFN = Total assets – Total liabilities and equity EFN = $707,375 – 682,886.25 EFN = $ 24,488.75 Inspection of the plot shows that EFN = 0 at approximately 18% growth rate. The formula for EFN is:
Image of page 23
EFN = -(PM)(R) + [(TA) – (PM)(R)](g) = Increase in total assets – Addition to retained earnings Setting EFN = 0 gives : g = (PM)(R) / [(TA) – (PM)(R)] This EFN equation is derived under the assumption that current liabilities are lumped together with long-term liabilities and that neither of these liabilities varies with sales, so that the only change on the right-hand side of the balance sheet occurs in retained earnings. However, in this question accounts payable vary with sales. Hence, we will not obtain exactly the same growth rate in this question at EFN = 0 from the plot as from the formula. 31. (LO2, 5) The pro forma income statements for all three growth rates will be: HOPINGTON TOURS INC. Pro Forma Income Statement 20% Sales Growth 30% Sales Growth 35% Sales Growth Sales $1,114,800 $1,207,700 $1,254,150 Costs 867,600 939,900 976,050 Other expenses 22,800 24,700 25,650 EBIT $ 224,400 $ 243,100 $ 252,450 Interest 14,000 14,000 14,000 Taxable income $ 210,400 $ 229,100 $ 238,450 Taxes (35%) 73,640 80,185 83,457.50 Net income $ 136,760 $ 148,915 $ 154,992.50 Dividends $ 41,028 $ 44,674.50 $ 46,497.75 Add to RE 95,732 104,240.50 108,494.75 Under the sustainable growth rate assumption, the company maintains a constant debt-equity ratio. The D/E ratio of the company is: D/E = ($158,000 + 85,000) / $322,900 D/E = .75255 At a 20 percent growth rate, and assuming the payout ratio is constant, the dividends paid will be: Dividends = ($33,735/$112,450)($136,760) Dividends = $41,028 And the addition to retained earnings will be: Addition to retained earnings = $136,760 – 41,028 Addition to retained earnings = $95,732
Image of page 24
Image of page 25

You've reached the end of your free preview.

Want to read all 32 pages?

  • Fall '15
  • Balance Sheet, Generally Accepted Accounting Principles, EFN

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture

Stuck? We have tutors online 24/7 who can help you get unstuck.
A+ icon
Ask Expert Tutors You can ask You can ask You can ask (will expire )
Answers in as fast as 15 minutes