13. External Funds Needed The Optical Scam Company has forecast a sales growth r
ID: 2621204 • Letter: 1
Question
13. External Funds Needed The Optical Scam Company has forecast a sales growth rate of 18 percent for next year. The current financial statements are shown below. Current assets, fixed assets, and short-term debt are proportional to sales Income statement Sales Costs Taxable income Taxes Net Income S31,600,000 S24,650,000 $6,950,000 $2,432,500 $4,517,500 $1,450,000 S3,067,500 Dividends Addition to retained earnings Balance Sheet Assets Liabilities and Equit $5,150,000 $7,700,000 Current assets $10,750,000Short-term debt Long-term debt Common stock Total equity S32,100,000 S3,100,000 $2,690,000 $30,000,000 Fixed assets Accumulated retained earnings Total assets $42,850,000Total liabilities and equity $42,850,000 (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 need you calculated in part (a) (c) Calculate the sustainable growth rate for the company (d) Can the company eliminate the need for external funds by changing its dividend policy? What other options are available to the company to meets growth obiectives?Explanation / Answer
(a) The external funds needed is as shown below :
External funds needed = 27,376,450
(b) Pro-forma balance sheet is as shown below:
(c) Sustainable growth rate = ROE * retention ratio
Retention ratio = 3619650/5330650 = 0.6790
ROE = Net Income/ Total equity = 5330650/9409650 = 0.5665
Sustainable growth rate = 0.6790*0.5665 =0.3846 = 38.46%
(d) By providing a lower dividend or not a giving a dividend at all does not eliminate the need for external financing since the dividend given is only a small percentage of the external funds needed.
The other option is to raise additonal equity for the external funds needed. We do not recommend debt, since additional debt increases the probability of bankruptcy.
Income Statement (Projected) Sales 37288000 Costs 29087000 Taxable Income 8201000 Taxes at 35% 2870350 Net Income 5330650 Dividends 1711000 Addition to retained earnings 3619650 Balance Sheet Assets Liabilties and Equity Current Assets 12685000 Short term debt 6077000 Fixed Assets 37878000 Long term debt 7700000 Common Stock 3100000 Accumulated Retained earnings 2690000 Addition to retained earnings 3619650 Total Assets 50563000 Total liabilities and equity 23186650 AFN 27376350Related Questions
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