We can solve for Return on Equity based on the percentages of Total Assets you ha
ROE = Net Income / Total Equity
ROE = Net Income as % of Total Assets /
Total Equity as % of Total Assets
Now you need to put this into a formula below

hese are the right formulas
eturns on total assets
calculations. Round
al Assets ratio because we
IF YOU WILL CHANGE THE VALUES GIVEN IN THIS PROBLEM YOU WILL BE
OBSERVE THE IMPACT OF HIGH LEVELS OF DEBT ON THE FIRM RETURN O
YOU CAN ALSO OBSERVE THE IMPACT OF HIGH (or low) RETURNS ON ASS
FIRM'S RETURN ON EQUITY.
TRY FIRM A WITH DEBT TO ASSETS = 25% AND ROA = 12%
AND FIRM B WITH DEBT TO ASSETS = 75% AND ROA = 12%
SEE WHAT HAPPENS!!
THIS SI AN EXAMPLE OF A FIRM WITH HIGH LEVERAGE (use of debt) AND I
TO EARN HIGH RETURNS, BUT THERE IS ALWAYS A CATCH.
THE FIRM MUS
PAY OFF THE HIGH INTEREST THAT GOES WITH THIS HIGH LEVEL OF DEBT
FACE BANKRUPTCY.
HIGH DEBT MEAN HIGH RISK, SO THE FIRM MUST MA
HIGH RETURNS TO COMPENSATE FOR THE HIGH RISK.
HERE I HAVE ADDED A REFERENCE TO THE CALCULATIONS BELOW SO THE ANSWER YOU WILL NEED FOR
QUIZ IS RIGHT UNDER THE QUESTION.
AFTER YOU HAVE ALL OF THE CALCULATIONS IN PLACE ALL YOU
ON THE ACTUAL QUIZ IS CHANGE THE DATA INPUT VARIABLES AND READ OUT THE ANSWER.

e as percentage of Total
ave developed above.

ABLE TO
ON EQUITY.
SETS AND THE
ITS POTENTIAL
ST BE ABLE TO
T OR IT WILL
AKE THESE
R THE ACTUAL
U WILL NEED TO DO

Problem 3-13 Calculating EFN
The Optical Scam Company has forecast a 20 percent sales growth rate for next year. The current financial statements are shown here:
DATA INPUTS
Sales
$30,400,000
Assets
Liabilities & Equi
Costs
$26,720,000
Total Current Assets
$7,200,000 Short-term liabilities
Taxable income
$3,680,000
Long-term debt
Taxes
$1,288,000
Fixed assets
$17,600,000
Net income
$2,392,000
Common stock
Retained earnings
Dividends
$956,800
Total Equity
Add. to retained earnings
$1,435,200
Total assets
$24,800,000 Total liabilities & equity
Dividend payout ratio
40%
= Dividend / Net Income
Sales increase
20%
Operating capacity
100%
In problems using the EFN estimating formula Operating Capacity is alw
Tax rate
35%
= Taxes paid / Taxable Income
Using the equation from the chapter, calculate the external funds needed for next year.
(Do not include the dollar sign ($). Roun
answer to the nearest whole dollar amount. (e.g., 1,234,567))
YOU WILL NEED TO ENTER ONLY THE VALUES HIGHLIGHTED IN YELLOW.

Assets / Sales =
81.58%
= Total Assets / Sales
Δ Sales = $ Change in Sales =
$6,080,000
= % Sales Increase x Sales
Debt / Sales =
21.05%
= Short-term Liabilities / Sales
PM = Profit Margin =
7.87%
= Net Income / Sales
Projected Sales =
$36,480,000
= Sales + $ Change in Sales
(1 - d) = Plowback Ratio =
60.00%
= 1 - Dividend payout ratio
EFN =
$1,957,760
=
[
(Assets/Sales) x $ Change in Sales
] − [
(Short-term Liabilities / Sales) x $

ROE =
0.1758823529
= Net Income / Total Equity
b = Plowback Ratio =
60.00%
= 1 - Dividend payout ratio
SUSTAINABLE GROWTH RATE =
11.80%
= (ROE x Plowback Ratio) / (1 - (ROE x Plowback Ratio))
Can Optical Scam eliminate the need for external funds by changing its dividend policy?

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- Spring '14
- AveryH.Henline
- Managerial Accounting, Balance Sheet, Sales, Net Income, Generally Accepted Accounting Principles, total assets