Question

Based on the Income Statement and Balance Sheet for the XYZ Corporation (see below):

    a)    create the Pro Forma statement for 2018 given the following assumptions:

- sales increase by 20%

- all items vary directly with sales (except for Notes Payable, LTD, Owners Equity)

- the company is currently operating at 100% capacity

- the dividend payout ratio stays at 50%

    Income Statement

2017

Pro Forma 2018

Sales

$3,000,000

Cost of Goods Sold

2,000,000

Depreciation

300,000

EBIT

700,000

Interest

200,000

Taxable Income

500,000

Taxes (40%)

200,000

Net Income

$300,000

Dividends

$150,000

Add. to Retained Earnings

$150,000

Balance Sheet

Assets

Liabilities & Owner's Equity

 2017

Pro Forma 2018

 

 

  2017

Pro Forma     2018

Cash

$190,000

Accounts Payable

$330,000

Accounts Receivable

450,000

Notes Payable

270,000

Inventory

360,000

 

 

Current Liabilities

$600,000

Current Assets

1,000,000

 

 

Long-term Debt

2,000,000

Net Fixed Assets

3,000,000

 

 

Total Liabilities

2,600,000

 

 

 

 

Common Stock

1,000,000

 

 

Retained Earnings

400,000

 

 

Total Assets

$4,000,000

 

 

Total

$4,000,000

b) What is the external financing needed (if any)?

    Answer___________________________

c) What is the Sustainable Growth Rate for the XYZ Corporation in 2018?

    Answer___________________________________

Answer 1

a.

XYZ Corporation Proforma Income Statement
	$
Sales	3,600,000
Cost of Goods Sold	2,400,000
Depreciation	360,000
EBIT	840,000
Interest	200,000
Taxable Income	640,000
Taxes ( 40 %)	256,000
Net Income	384,000
Dividends	192,000
Addition to Retained Earnings	192,000

b.

XYZ Corporation Proforma Balance Sheet
Assets	$	$	Liabilities and Owners' Equity	$	$
Cash	228,000		Accounts Payable	396,000
Accounts Receivable	540,000		Notes Payable	270,000
Inventory	432,000		Total Current Liabilities		666,000
Total Current Assets		1,200,000	Long- term Debt		2,000,000
			Total Liabilities		2,666,000
Net Fixed Assets		3,600,000	Equity
			Common Stock	1,000,000
			Retained Earnings	592,000
			Total Owners' Equity		1,592,000
Total Assets		4,800,000			4,258,000

External financing needed = $ 4,800,000 - $ 4,258,000 = $ 542,000.

c. Sustainable growth rate for 2018 = Net Income / Sales x Sales / Total Assets x Total Assets / Total Equity x Retention Ratio = 384,000 / 3,600,000 x 3,600,000 / 4,800,000 x 4,400,000 / 1,592,000 x (100% - 50 % )= 12.06 %