Q4. Calculate the sustainable growth rate for LSUS corporation. Calculate external funds needed (EFN) and prepare pro forma income statements and balance sheets assuming growth at precisely this rate. Recalculate the ratios in the previous question. What do you observe?
Choice 2:
Ratios and Financial Planning After Han’s analysis of LSUS corporation’ cash flow, Amanda, the CEO of the company, approached Han about the company’s performance and future growth plans. First, Amanda wants to find out how LSUS corporation is performing relative to its peers. Additionally, she wants to find out the future financing necessary to fund the company’s growth. In the past, LSUS corporation experienced difficulty in financing its growth plan, in large part because of poor planning. In fact, the company had to turn down several large jobs because its facilities were unable to handle the additional demand. Amanda hoped that Han would be able to estimate the amount of capital the company would have to raise next year so that LSUS corporation would be better prepared to fund its expansion plans. To get Han started with his analyses, Amanda provided the following financial statements. Han then gathered the industry ratios for the LSUS Corporation industry.
2019 Income Statement LSUS Corporation
Sales $611,582,000
Cost of goods sold 431,006,000
Selling, general, and administrative 73,085,700
Depreciation 19,958,400
EBIT $ 87,531,900
Interest expense 11,000,900
EBT $ 76,531,000
Taxes 30,612,400
Net income $ 45,918,600
Dividends $ 17,374,500
Retained earnings $ 28,544,100
2019 Balance Sheet LSUS
Corporation Current assets Current liabilities
Cash and equivalents $ 11,119,700
Accounts payable $ 44,461,550
Accounts receivable 18,681,500
Accrued expenses 6,123,200
Inventory 20,149,650
Total current liabilities $ 50,584,750
Other 1,172,200
Total current assets $ 51,123,050
Fixed assets
Long-term debt $169,260,000
Property, plant, and equipment $457,509,600
Total long-term liabilities $169,260,000
Less accumulated depreciation (113,845,900)
Net property, plant, and equipment $343,663,700
Intangible assets and others 6,772,000
Stockholders’ equity Total fixed assets $350,435,700
Preferred stock $ 1,970,000
Common stock 37,583,700
Capital surplus 28,116,300
Accumulated retained earnings 161,564,000
Less treasury stock (47,520,000)
Total equity $181,714,000
Total assets $401,558,750
Total liabilities and shareholders’ equity $401,558,750
LSUS Corporation Industry Ratios LOWER QUARTILE MEDIAN UPPER QUARTILE Current ratio .86 1.51 1.97 Quick ratio .43 .75 1.01 Total asset turnover 1.10 1.27 1.46 Inventory turnover 12.18 14.38 16.43 Receivables turnover 10.25 17.65 22.43 Debt ratio .32 .56 .61 Debt–equity ratio .83 1.13 1.44 Equity multiplier 1.83 2.13 2.44 Interest coverage 5.72 8.21 10.83 Profit margin 5.02% 7.48% 9.05% Return on assets 7.05% 10.67% 14.16% Return on equity 14.06% 19.32% 26.41%
Homework Answers
Sustainable growth rate (g) = Retention ratio (b) * Return on Equity (r)
Retention ratio = Retained earnings/Net Income = 28544100/45918600 = 62.16%
Return on equity = Net income/Average Stockholder's equity
where Average Stockholder's equity = (Stockholder's equity at the beginning + Stockholder's equity at the end)/2
Stockholder's equity at the end = $181,714,000
Stockholder's equity at the beginning = $181,714,000 - $28,544,100 = $153,169,900
Average Stockholder's equity = ($153,169,900+$181,714,000)/2 = $167,441,950
Return on equity = $45,918,600/$167,441,950 = 27.42%
Sustaianable growth rate (g) = 62.16% * 27.42% = 17.05%
Add Answer to:
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