Question

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%

earnings 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 Selling, general, and administrative Depreciation 431,006,000 73.085,700 19.958.400 ЕВIT $ 87.531,900 Interest expense 11.000,900 S 76,531,000 ЕBT 30.612 400 Таxes Net income S 45,918,600 $ 17,374.500 S 28.544.100 Dividends Retained earnings

Answer 1

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%