Percentage of Sales Exercise C solution PDF

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Percentage of Sales Exercise C solution...

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Example Problem Percentage of Sales Method 1.

Below are the most recent financial statements for XYZ Corp. If sales increase by 20% next year, what would the external financing need be? (Assume the company is running at 100% of capacity, notes payable are part of the financing requirements, and the dividend payout ratio is 25%).

2.

Suppose the company is running at 90% capacity. Now what would the external financing need be?

3.

Calculate the Internal Growth Rate and the Sustainable Growth Rate.

Income Statement Sales Cost of Goods Sold Administrative Expense Depreciation EBIT Interest Expense Tax @40% Net Income

940 540 50 90 260 60 80 120

Balance Sheet

Cash A/R Inventory Current Assets

210 320 270 800

A/P N/P CL LTD

240 100 340 640

PP&E Acc. Depr. NFA

1740 540 1200

C/S

200

RE

820

Total Assets

2000

Total L&E

2000

1.

External Financing Need Income Statement

Sales Cost of Goods Sold Administrative Expense Depreciation EBIT Interest Expense Tax @40% Net Income Dividends @25% Add. to RE

Actual 940 540 50 90 260 60 80 120 30 90

Pro Forma 1128 648 60 108 312 72 96 144 36 108 Balance Sheet

Cash A/R Inventory CA

Actual 210 320 270 800

Pro Forma 252 384 324 960

A/P N/P CL

Actual 240 100 340

PP&E Acc. Depr. NFA

1740 540 1200

2088 648 1440

Total Assets

2000

2400

Total L&E

Pro Forma 288 100 388

LTD

640

640

C/S RE

200 820

200 928

2000

2156

External Financing Need = 2,400 - 2,156 = 244

2. Recalculate EFN assuming 90% capacity utilization. Full Capacity Sales = 940/.9 = 1044.44 Pro Forma Net Fixed Assets = 1200 (1128/1044.44) = 1296 New Pro Forma Total Assets = 960 + 1296 = 2256 New External Financing Need = 2256 - 2156 = 100

3. Calculate IGR and SGR. ROA = 120/2000 = .06 Capital Balance Sheet – ROC = 120/1760 = .0682

ROE = 120/1020 = .11765

IGR = (b ROA)/(1-b ROA) = (.75 x .06)/(1- .75 x .06) = .04712 = 4.7% (approx.) Capital Balance Sheet – = (.75 x .0682)/(1- .75 x .0682) = .05389 = 5.4% (exact) SGR = (b ROE)/(1-b ROE) = (.75 x .11765)/(1- .75 x .11765) = .0968 = 9.7%...