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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- Spring '02
- SCOTTANDERSON
- Balance Sheet, Corporate Finance, Generally Accepted Accounting Principles, EFN