Question

Given the most recent financial statements for Microsoft (FY2019). Sales for FY2020 are expected to grow by 4 percent. The following assumption must hold in the pro forma financial statements. The tax rate (percentage) and the dividend payout ratio (percentage) will remain constant. COGS, SGA, Depreciation, Interest Expense, Cash, Account Receivable, Inventory, Other Current Assets, and Net Fixed Asset increase spontaneously with sales. If the firm is operating at full capacity and no new debt or equity are issued, calculate the internal growth rate for the firm. (Enter percentages as decimals and round to 4 decimals) Simplified Statements for MSFT Balance Sheet FY2019 Income Statement FY2019 Cash Acct. Receivable 147,145 29,129 2,928 Sales COGS SGA Depreciation EBIT 7.409 115,450 42,500 38,000 15,000 19,950 3,550 Inventory Other Current Assets Net Fixed Assets Total Assets 103,910 290,521 Interest Expense EBT 16,400 9,479 Taxes Net Income Dividends Addition to Retained Earnings 3444 12,956 6,000 6,956 Acct. Payable Long Term Debt Common Stock Retained Earnings Total Liab. And Equity 184,246 78,345 18,451 290,521

Answer 1

Solution:

Proforma Statement for the year 2020:

The sales for FY2020 is 4% higher than FY 2019.

Sales for 2020 = (1+(4/100) * 115450 = 120068.

COGS will grow simultaneous with sales volume.

COGS for 2020 = COGS of 2019 / sales in 2019 * sales in 2020

COGS for 2020 = 42500 / 115450 * 120068

   = 44200

Similarly calculate the other terms that grow simultaneous with sales.

Taxes and dividend rate is similar for the years.

To find out tax rate use the formula,

Tax rate = tax paid / EBT

   = 3444 / 16400 = 0.21 = 21%

Dividend payout percentage = Dividend / net income

   = 6000 / 12956

   = 0.4631 = 46.31%

Tax to be paid for FY2020 is found by multiplying EBT of FY2020 * Previous year tax rate.

Similarly the Dividend to be paid is calculated.

	FY 2019	FY 2020
Sales	115450	120068.00
COGS	42500	44200.00
SGA	38000	39520.00
Depreciation	15000	15600.00
EBIT	19950	20748.00
Interest Expense	3550	3692.00
EBT	16400	17056.00
Taxes	3444	3581.76
Net Income	12956	13474.24
Dividends	6000	6240.00
Addition to Retained Earnings	6956	7234.24

Balance Sheet:

In balance sheet the Total asset must be equal to total liabilities and equities.

It is also given that no new debt and equity is issued. Therefore the value of Long term debt and common stock is going to be same for the years. The retained earnings for FY2020 is added to previous year's addition to retained earning to find out this years value.

Using the logic, Total asset = Total liabilities and equities , the account payable is calculated.

Account payable for FY 2020 = Total asset - Common stock - long term debt - addition to retained earnings

= 302141.84 - 184246 - 78345 - 25685.24

= 13865.60

	FY 2019	FY 2020
Cash	147145	153030.80
Acc. Receivables	29129	30294.16
Inventory	2928	3045.12
Other Current Assets	7409	7705.36
Net Fixed Assets	103910	108066.40
Total Assets	290521	302141.84
Acc. Payable	9479	13865.60
Long term debt	184246	184246.00
Common stock	78345	78345.00
Addition to Retained earnings	18451	25685.24
Total Liab. And Equity	290521	302141.84

Internal growth rate for the firm:

Internal growth rate can be found out by using the formula given below

Internal growth rate = Retention rate * Return on asset

Retention rate = (1-Dividend payout ratio)

Dividend payout ratio = dividend paid / Net income

Dividend payout ratio = 6240 / 13474.24

                                           = 0.4631

Therefore, Retention rate = (1 – 0.4631)

                                                = 0.5369

ROA = Net income / Total Asset

                = 13474.24 / 302141.84

                = 0.044596 = 4.4596 %

Internal growth rate for firm = 4.4596 * 0.5369

                                                        = 2.3943 %