Question

D Question 4 8 pts Consider the following recent financials for XYZ Corporation: Income Statement Balance Sheet Sales7 72,429 Assets 178,884 Debt 44,955 Costs 43,457 Equity 133,929 EBIT 28,972 Taxes@ 11,009 Total 178,884 Total 178,884 38% Net 17,963 Income Assets and costs are proportional to sales. Debt and equity are not. A dividend of $2.577 was ichoc to. nintin a constant navout ratio. Next vear's sales are

Answer 1

Year	Recent Year	Basis for projections	Next year
INCOME STATEMENT:
Sales	72429	+24%	89812
Costs	43457	60% of sales	53887
EBIT	28972		35925
Taxes at 38%	11009		13651
Net income	17963		22273
Dividends (14.35%)	2577		3196
Addition to retained earnings	15386		19077
BALANCE SHEET:
Assets	178884	246.98% of sales	221818
Debt	44955		44955
Equity	133929	+19077	153006
Total debt and equity	178884		197961
		EFN	23856
ANSWERS:
Proforma value for equity	153006
EFN required	23856
IGR = ROA*b/(1-ROA*b)
where ROA = return on assets,
b = retention ratio.
ROA = 17963/178884 =	10.04%
Retention ratio = 15386/17963 =	85.65%
IGR = 0.1004*0.8565/(1-0.1004*0.8565) =	9.41%
IGR = ROE*b/(1-ROE*b)
where ROE = return on equity,
b = retention ratio.
ROA = 17963/133929 =	13.41%
Retention ratio = 15386/17963 =	85.65%
IGR = 0.1341*0.8565/(1-0.1341*0.8565) =	12.98%