Question

69,183 is not the correct answer

The most recent financial statements for Crosby, Inc., follow. Sales for 2018 are projected to grow by 30 percent. Interest expense will remain constant; the tax rate and the dividend payout rate will also remain constant. Costs, other expenses, current assets, fixed assets, and accounts payable increase spontaneously with sales.

CROSBY, INC. 2017 Income Statement
Sales				$	771,000
Costs					627,000
Other expenses					33,000
Earnings before interest and taxes				$	111,000
Interest paid					17,200
Taxable income				$	93,800
Taxes (23%)					21,574
Net income				$	72,226
Dividends	$	20,640
Addition to retained earnings		51,586

CROSBY, INC. Balance Sheet as of December 31, 2017
Assets				Liabilities and Owners’ Equity
Current assets				Current liabilities
Cash	$	26,040		Accounts payable	$	64,600
Accounts receivable		35,540		Notes payable		20,000
Inventory		72,140		Total	$	84,600
Total	$	133,720		Long-term debt	$	119,000
				Owners’ equity
Fixed assets				Common stock and paid-in surplus	$	118,000
Net plant and equipment	$	228,000		Retained earnings		40,120
				Total	$	158,120
Total assets	$	361,720		Total liabilities and owners’ equity	$	361,720

What is the EFN if the firm wishes to keep its debt-equity ratio constant? (Do not round intermediate calculations and round your answer to the nearest whole dollar amount, e.g., 32.)

Answer 1

Proforma Income Statement for 2018
Sales ($771,000 × 130%)		$1,002,300
Less: Expenses
Cost ($627,000 × 130%)	$815,100
Other expense ($33,000 × 130%)	$42,900	$858,000
Earnings before interest and taxes		$144,300
Interest paid		($17,200)
Taxable Income		$127,100
Taxes ($127,100 × 23%)		($29,233)
Net Income		$97,867
Dividend payout ratio ($20,640/$72,226)		28.58%
Dividend [$97,867 × 28.58%]		$27,970
Addition to retained earnings ($97867 - $27,970)		$69,897

___________________________________________________________

CROSBY INC.
Pro Forma Balance Sheet
Assets		Liabilities and Owner's Equity
Cash ($26040 × 130%)	$3,382	Current Liabilities
Accounts receivable ($35540 × 130%)	$46,202	Accounts payable ($64600 × 130%)	$83,980
Inventory ($72140 × 130%)	$93,782	Note payable	$20,000
Total	$143,366	Total	$103,980
		Long-term debt	$119,000
Fixed assets
Net plant and equipment ($228000 × 130%)	$296,400	Owner's equity
		Common stock and paid in surplus	$118,000
		Retained Earnings ($40120 + $69897)	$110,017
		Total	$228,017
Total Assets	$439,766	Total Liabilities and owners' equity	$450,997

Existing Debt equity ratio is constant:

Debt equity ratio = $203600/$158120 = 1.29

Therefore, New Total Debt = $228017 $\times$ 1.29 = $293601.45

New debt of the company should be = $293,601.45

EFN = $293,601.45 - $103,980 - $119000 = $70621.45