Question

Consider the following recent financials for XYZ Corporation: Income Statement Balance Sheet Sales 72,429Assets 178,884 Debt 44,955 Costs 43,457 Equity 133,929 EBIT 28,972 Taxes @ 38% 11,009 Total 178,884Total 178,884 Net income|17963 Assets and costs are proportional to sales. Debt and equity are not. A dividend of $2.57

Answer 1

Calculation of proforma value of equity:

Given, Sales = $72,429; Costs = $43,457; Assets = $178,884

It was given that costs and assets are proportional to sales. Debt and equity are not.

Costs to sales ratio = $43,457/ $72,429 = 0.5999

Assets to sales ratio = $178,884/ $72,429 = 2.4697

If next year sales grow by 24% then sales = $72,429 * 124% = $89,811.96

Next year costs = next year sales * costs to sales ratio

= $89,811.96 * 0.5999 = $53,878.194

Next year assets = next year sales * assets to sales ratio

= $89,811.96 * 2.4697 = $221,808.597

next year EBIT = next year sales - next year costs = $89,811.96 - $53,878.194 = $35,933.766

next year net income = next year EBIT - tax = $35,933.766 - (30% * $35,933.766) = $25,153.6362

Pro forma value of equity = assets + next year net income = $178,884 + $25,153.6362 = $204,037.64

Calculation of net financing needed:

Net financing needed = next year assets - proforma value of equity = $221,808.597 - $204,037.64 = $17,770.96

Internal Growth rate (IGR):

Net income = $17,963

Dividend paid = $2,577

Dividend pay-out ratio = ($2,577/ $17,963) * 100 = 14.35%

assets = $178,884

return of assets = net income/ assets = ($17,963/ $178,884) * 100 = 10.04%

Internal growth rate = (1 - dividend payout ratio) * return on assets = (1 - 14.35%) * 10.04%

= (0.8565) * 10.04% = 0.0859 = 8.59%

IGR = 8.59%

Sustainable growth rate (SGR):

net income = $17,963

Dividend pay-out ratio = 14.35%

equity = $133,929

return on equity = net income/ equity = $17,963/ $133,929 = 0.13412 = 13.41%

SGR = (1 - dividend payout ratio) * return on equity = (1 - 14.35%) * 13.41%

= (0.8565) * 13.41% = 0.11485 = 11.49%

SGR = 11.49%