Assuming costs and assets increase proportionally, the pro forma financial
statements will look like this:
Pro forma income statement
Pro forma balance sheet
Sales $
7,434.00
Assets
$
21,594
Debt $
12,400
Costs
4,590.20
Equity
8,743.80
Net income
$
2,843.80
Total $
21,594
Total $
21,143.80
If no dividends are paid, the equity account will increase by the net income, so:
Equity = $5,900 + 2,843.80
Equity = $8,743.80

Note that the balance sheet does not balance. This is due to EFN. The EFN for this
company is:
EFN = Total assets – Total liabilities and equity
EFN = $21,594 – 21,1434 = -$450
4.
(LO2)
An increase of sales to $21,840 is an increase of:
Sales increase = ($21,840 – 19,500) / $19,500
Sales increase = .12 or 12%
Assuming costs and assets increase proportionally, the pro forma financial
statements will look like this:
Pro forma income statement
Pro forma balance sheet
Sales $
21,840
Assets
$
109,760 Debt $
52,500
Costs
16,800
Equity
46,956
EBIT
5,040 Total $
109,760
Total $
99,456
Taxes (40%)
2,016
Net income
$
3,024
The payout ratio is constant, so the dividends paid this year is the payout ratio from
last year times net income, or:
Dividends = ($1,400 / $2,700)($3,024)

Dividends = $1,568
The addition to retained earnings is:
Addition to retained earnings = $3,024 – 1,568
Addition to retained earnings = $1,456
And the new equity balance is:
Equity = $45,500 + 1,456
Equity = $46,956
So the EFN is:
EFN = Total assets – Total liabilities and equity
EFN = $109,760 – 99,456
EFN = $10,304
5.
(LO2)
Assuming costs, assets and current liabilities increase proportionally, the
pro forma financial statements will look like this:
Pro forma income statement
Pro forma balance sheet
Sales $
4,830.00
CA
$
4,140.00
CL
$
2,415.00
Costs
3795.00
FA
9085.00
LTD
3,650.00

Taxable income
1,035.00
Equity
6,159.86
Taxes (34%)
351.90
Total $13,225.00
Total $
12,224.86
Net income
$
683.10
The payout ratio is 40 percent, so dividends will be:
Dividends = 0.40($683.10)
Dividends = $273.24
The addition to retained earnings is:
Addition to retained earnings = $683.10– 273.24
Addition to retained earnings = $409..86
So the EFN is:
EFN = Total assets – Total liabilities and equity
EFN = $13,225 – 12,224.86
EFN = $1,000.14
6.
(LO5)
To calculate the internal growth rate, we first need to calculate the ROA, which
is:
ROA = NI / TA
ROA = $2,262 / $39,150

ROA = .0577 or 5.77%
The retention ratio, R, is one minus the payout ratio, so:
R= additional to retained earning / net income; 1- payout ratio
R = 1 – .30
R = .70
Now we can use the internal growth rate equation to get:
Internal growth rate = (ROA × R) / [1 – (ROA × R)]
Internal growth rate = [0.0577(.70)] / [1 – 0.0577(.70)]
Internal growth rate = .04209 or 4.209%
7.
(LO5)
To calculate the sustainable growth rate, we first need to calculate the ROE,
which is:
ROE = NI / TE
ROE = $2,262 / $21,650
ROE = .1045 or 10.45%
The retention ratio, R, is one minus the payout ratio, so:
R = 1 – .30
R = .70

Now we can use the sustainable growth rate equation to get:
Sustainable growth rate = (ROE × R) / [1 – (ROE × R)]
Sustainable growth rate = [0.1045(.70)] / [1 – 0.1045(.70)]
Sustainable growth rate = .0789 or 7.89%
8.
(LO2)
The maximum percentage sales increase is the sustainable growth rate. To
calculate the sustainable growth rate, we first need to calculate the ROE, which is:
ROE = NI / TE
ROE = $8,910 / $56,000
ROE = .159107142
The retention ratio, R, is one minus the payout ratio, so:
R = 1 – .30
R = .70
Now we can use the sustainable growth rate equation to get:
Sustainable growth rate = (ROE × R) / [1 – (ROE × R)]
Sustainable growth rate = [.1591(.70)] / [1 – .1591(.70)]
Sustainable growth rate = .125334083 or 12.53%

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- Fall '15
- Balance Sheet, Generally Accepted Accounting Principles, EFN, Owners’ Equity