Question

Problem 4-31 EFN and Sustainable Growth (LO 2, 4) The most recent financial statements for Hopington Tours Inc. follow. Sales for 2018 are projected to grow by 30 and 35% in addition to 20%. Interest expense will remain constant; the tax rate and the dividend payout rate will also remain constant. Costs, other expenses, current assets, and accounts payable increase spontaneously with sales. The firm wishes to keep its debt-equity ratio constant. (Do not round intermediate calculations. Round the final answers to 2 decimal places. Negative answers should be indicated by a minus sign. Omit $ sign in your response.) HOPINGTON TOURS INC. 2017 Statement of Comprehensive Income Sales Costs Other expenses Earnings before interest and taxes Interest paid Taxable income Taxes (35%) Net income Dividends $33, 735 Addition to retained earnings 78,715 $929,000 723,000 19,000 $187,000 14,000 $173,000 60,550 $112,450

Answer 1

Solution: 30.00% Payout ratio=Dividend/Net income 33735/112450 Tax rate 35% Proforma Income statement Sales costs other expenses EBIT Interest expense Taxable income Taxes at 35% Net income Dividend @30% Add to RE 20% 30% 35% 2017 sales growth sales growth sales growth 929000.00 1114800.00 1207700.000 1254150.00 723000.00 867600.00 939900.00 976050.00 19000.00 22800.00 24700.00 25650.00 187000.00 224400.00 243100.00 252450.00 | 14000.00 14000.00 14000.00 14000.00 | 173000.00 210400.00 229100.00 238450.00 [60550.00 73640.00 80185.000 83457.50 112450.00 136760.00 148915.00 154992.50 33735.00 41028.00 44674.501 46497.75 78715.00 95732.00 104240.50 108494.75 + income Current debt to equity ratio=(85000+158000)/322900 0.7525550 20% Current total equity | 322900.00 Add to RE 95732.00 Projected total equity 418632.00 x Debt to equity ratio 0.7525550 Total required debt 315043.59 Less : Projected accounts payable = 68000*(1+sales growth) | -81600.00 Less : note payable 17000.00 Less : Long term debt -158000.00 EFN 58443.59 30% 322900.00 104240.50 427140.50 0.7525550 321446.71 -88400.00 -17000.00 -158000.00 58046.71 35% 322900.00 108494.75 431394.75 0.7525550 324648.26 -91800.00 -17000.00 -158000.00 57848.26