Assuming costs and assets increase proportionally the pro forma financial

# Assuming costs and assets increase proportionally the

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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 = 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% So, the maximum dollar increase in sales is: Maximum increase in sales = \$42,000(.125334083) Maximum increase in sales = \$5,264.03

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