p0
Homework Answers
| a) | EFN = [(Assets / Sales) x Δ sales] - [(Debt / Sales) x Δ sales] - [(Projected sales x Profit margin) x (1-Dividend payout ratio)] | |||
| = (25920000/32000000)*32000000*25%-(7040000/32000000)*32000000*25%-32000000*125%*11.56%*60% = | ||||
| = $1945600 (EFN) | ||||
| b-1) | Year | Current Year | Basis for projections | Next year |
| INCOME STATEMENT: | ||||
| Sales | 32000000 | +25% | 40000000 | |
| Costs | 26309400 | 82.22% of sales | 32886750 | |
| EBIT | 5690600 | 7113250 | ||
| Taxes at 35% | 1991710 | 2489638 | ||
| Net income | 3698890 | 0.115590313 | 4623613 | |
| Dividends (40%) | 1479556 | 1849445 | ||
| Addition to retained earnings | 2219334 | 2774168 | ||
| BALANCE SHEET: | ||||
| Current assets | 7360000 | 23% of sales | 9200000 | |
| Fixed assets | 18560000 | 58% of sales | 23200000 | |
| 25920000 | 32400000 | |||
| Short term debt | 7040000 | 22% of sales | 8800000 | |
| Long term debt | 2240000 | 2240000 | ||
| Common stock | 6070000 | 6070000 | ||
| Accumulated retained earnings | 10570000 | +2774168 | 13344168 | |
| Total debt and equity | 25920000 | 30454168 | ||
| b-2) | EFN | 1945833 | ||
| Difference in answers under [a] and [b-2] is due to approximation. | ||||
| c) | SGR = ROE*b/(1-ROE*b) | |||
| where ROE = return on equity, | ||||
| b = retention ratio. | ||||
| ROE = 3698890/(6070000+10570000) = | 22.23% | |||
| Retention ratio = 60% | ||||
| SGR = 0.2223*0.60/(1-0.2223*0.60) = | 15.39% | |||
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