Question

Please, please, please adhere to the rounding instructions (written in red), or the answer will be wrong.
Thank you!!

Question 4 8 pts Consider the following recent financials for XYZ Corporation: Income StatementBalance Sheet Sales 52,961Assets 172,178 Debt 48,642 Costs 31,777 Equity 123.536 EBIT 21,184 Taxes @ 38% 8,050 Total 172,178 Total 172,178 Net Income 13,134 Assets and costs are proportional to sales. Debt and equity are not. A dividend of $3,109 was paid, and the company wishes to maintain a constant payout ratio. Next year's sales are projected to grow by 27%.

Answer 1

Current Sales = $ 52961, As sales are expected to gorw by 27% next year, both assets and costs are expected to grow by the same %. However, debt and equity on account of being financing decisions do not change proportionally.

Expected Sales = 52961 x 1.27 = $ 67260.47

Expected Costs = 31777 x 1.27 = $ 40356.79

Expected EBIT = (67260.47 - 40356.79) = $ 26903.68

Tax @ 38% = 0.38 x 26903.68 = $ 10223.4

Expected Net Income = $ 16680.28

Expected Assets = 172178 x 1.27 = $ 218666.1

Current Dividend = $ 3109 and Current Net Income = $ 13134, Current Dividend Payout Ratio = (3109 / 13134) ~ 0.2367

As the dividend payout ratio remains constant, Expected Dividend = Constant Payout Ratio x Expected Net Income = 0.2367 x 16680.28 ~ $ 3948.454

Expected Retained Earnings = RE = 16680.28 - 3948.454 ~ $ 12731.83

Therefore, Pro-Forma Equity Value = Existing Equity Value + RE = 123536 + 12731.83 ~ $ 136267.8

New Asset Level = New Liabilities Level + New Equity Level + RE + External Financing needed

External Financing Needed = 218666.1 - 48642 - 123536 - 12731.83 ~ $ 33756.23

Internal Growth Rate (Growth Rate achievable using only retained earnings) = Retention Ratio x (Net Income / ROA) x 100 = (1-Payout Ratio) x (Net Income / Total Assets) x100 = (1-0.2367) x (13134 / 172178) x 100 ~ 5.82 %

Sustainable Growth Rate (Growth Rate achievable by means of external financing while mantaining the firm's existing capital structure) = (Retention Ratio) x (Net Income / Equity) x 100 = (1-0.2367) x (13134/123536) x 100 ~ 8.11 %