Problem

External Funds Needed The Optical Scam Company has forecast a 20 percent sales growth rate...

External Funds Needed The Optical Scam Company has forecast a 20 percent sales growth rate for next year. The current financial statements are shown here:

Income Statement

Sales

 

$30,400,000

Costs

 

26,720,000

Taxable income

 

$ 3,680,000

Taxes

 

1,288,000

Net income

 

$ 2,392,000

Dividends

$ 956,800

 

Addition to retained earnings

1,435,200

 

Balance Sheet

Assets

Liabilities and Equity

Current assets $

7,200,000

Short-term debt

$ 6,400,000

 

 

Long-term debt

4,800,000

Fixed assets

17,600,000

 

 

 

 

Common stock

$ 3,200,000

 

 

Accumulated retained earnings

10,400,000

 

 

Total equity

$13,600,000

Total assets

$24,800,000

Total liabilities and equity

$24,800,000

a.Using the equation from the chapter, calculate the external funds needed for next year.


b.Construct the firm’s pro forma balance sheet for next year and confirm the external funds needed that you calculated in part (a).


c.Calculate the sustainable growth rate for the company.


d.Can Optical Scam eliminate the need for external funds by changing its dividend policy? What other options are available to the company to meet its growth objectives?

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