Finance Calculations

Chapter 18, Question 2- Find the sustainable and internal growth rates for a firm with the following ratios: asset turnover = 1.60; profit margin = 6%; payout ratio = 30%; equity/assets = .50. (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.)

  Sustainable growth rate

%  

  Internal growth rate

%  

Chapter 18, Question 3- Executive Fruit’s financial manager believes that sales in 2015 could rise by as much as 20% or by as little as 5%. Assets and costs change in proportion to sales, debt remains constant, and no new equity financing occurs.

a.

Recalculate the first-stage pro forma financial statements under these two growth assumptions and calculate the required external financing (All figures are in thousands).  (Enter your answers in thousands.)

Base Case

     20% Growth

     5% Growth

INCOME STATEMENT

  Revenue

$

3,000

$  

$  

  Cost of goods sold

2,700

  EBIT

$

300

$  

$  

  Interest

60

  Earnings before taxes

$

240

$  

$  

  State and federal tax

96

  Net income

$

144

$  

$  

  Dividends

96

  Retained earnings

$

48

$  

$  

BALANCE SHEET

  Assets

     Net working capital

$

300

$  

$  

     Fixed assets

1,200

     Total assets

$

1,500

$  

$  

  Liabilities and shareholders' equity

     Long-term debt

$

600

$  

$  

     Shareholders' equity

900

     Total liabilities and shareholders' equity

$

1,500

$  

$  

  Required external financing

$  

$  

b.

Assume any required external funds will be raised by issuing long-term debt and that any surplus funds will be used to retire such debt. Prepare the completed (second-stage) pro forma balance sheet. (Enter your answers in thousands.)

BALANCE SHEET

Base Case

20% Growth    

5% Growth    

  Assets

     Net working capital

$

300

$  

$  

     Fixed assets

1,200

     Total assets

$

1,500

$  

$  

  Liabilities and shareholders' equity

     Long-term debt

$

600

$  

$  

     Shareholders' equity

900

     Total liabilities and shareholders' equity

$

1,500

$  

$  

Chapter 18, Question 6- The 2015 financial statements for Growth Industries are presented below:

INCOME STATEMENT, 2015

  Sales

$

280,000   

  Costs

190,000   

  EBIT

$

90,000   

  Interest expense

18,000   

  Taxable income

$

72,000   

  Taxes (at 35%)

25,200   

  Net income

$

46,800   

    Dividends

$ 23,400   

    Addition to retained earnings

23,400   

BALANCE SHEET, YEAR-END, 2015

Assets

Liabilities

  Current assets

  Current liabilities

    Cash

$

4,000   

    Accounts payable

$

11,000   

    Accounts receivable

9,000   

    Total current liabilities

$

11,000   

    Inventories

37,000   

  Long-term debt

180,000   

      Total current assets

$

50,000   

  Stockholders’ equity

  Net plant and equipment

220,000   

    Common stock plus additional paid-in capital

15,000   

    Retained earnings

64,000   

  Total assets

$

270,000   

  Total liabilities and stockholders’ equity

$

270,000   

Sales and costs in 2016 are projected to be 40% higher than in 2015. Both current assets and accounts payable are projected to rise in proportion to sales. The fixed assets of Growth Industries are operating at only 70% of capacity. Interest expense in 2016 will equal 10% of long-term debt outstanding at the start of the year. The firm will maintain a dividend payout ratio of .50.

What is the required external financing over the next year?

Even if sales increase by 40%, the firm still has more than enough fixed assets to meet production. Only working capital will increase. Net working capital of the firm in 2015 was $. The increase in net working capital will be $, which is less than the increase in the retained earnings. Thus required external financing is $. A negative external financing value indicates the firm will generate more cash than it needs to finance the projected growth. This extra cash can be used to reduce debt, repurchase shares, increase cash reserves, or fund future growth. This extra cash was primarily due to the firm's excess production capacity.