The most recent financial statements for Fleury Inc., follow. Sales for 2015 are

Question

The most recent financial statements for Fleury Inc., follow. Sales for 2015 are projected to grow by 25 percent. Interest expense will remain constant; the tax rate and the dividend payout rate will also remain constant. Costs, other expenses, current assets, fixed assets and accounts payable increase spontaneously with sales. FLEURY, INC. 2014 Income Statement Sales $ 753,000 Costs 588,000 Other expenses 24,000 Earnings before interest and taxes $ 141,000 Interest paid 10,000 Taxable income $ 131,000 Taxes (30%) 39,300 Net income $ 91,700 Dividends $ 31,440 Addition to retained earnings 60,260 FLEURY, INC. Balance Sheet as of December 31, 2014 Assets Liabilities and Owners’ Equity Current assets Current liabilities Cash $ 21,240 Accounts payable $ 55,400 Accounts receivable 33,560 Notes payable 14,600 Inventory 70,520 Total $ 70,000 Total $ 125,320 Long-term debt $ 101,000 Owners’ equity Fixed assets Common stock and paid-in surplus $ 100,000 Net plant and equipment $ 210,000 Retained earnings 64,320 Total $ 164,320 Total assets $ 335,320 Total liabilities and owners’ equity $ 335,320 What is the EFN if the firm wishes to keep its debt-equity ratio constant? (Do not round intermediate calculations. Round your answer to the nearest whole dollar amount.) EFN $

Explanation / Answer

Assuming costs vary with sales and a 25 percent increase in sales, the pro forma income statement will look like this

                                                         Fleury Inc

                                                   Proforma Income Statement

The payout ratio is constant, so the dividends paid this year is the payout ratio from last year times net income, or:

Dividends=Dividends/Net income= (31,440/91,700)*new net income= 0.343*131,775 = $45,180

And the addition to retained earnings will be:

Addition to retained earnings = $131,775-$45,180 = $86,595

The new retained earnings on the pro forma balance sheet will be

New retained earnings = 64,320+86,595 = $150,915

The pro forma balance sheet will look like this

                                                               Fleury Inc

                                                   Proforma Balance Sheet

So the EFN is:

EFN = Total assets- Total Liabilities

EFN = $419,150-$435,765

EFN = -$16,615

Sales(753,000*1.25) $941,250 Cost 735,000 Taxable income 188,250 Taxes(30%) 56,475 Net Income $131,775

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