chapter 3 Q 8: The Optical Scam Company has forecast a sales growth rate of 25 p
ID: 2813470 • Letter: C
Question
chapter 3 Q 8:
The Optical Scam Company has forecast a sales growth rate of 25 percent for next year. The current financial statements are shown here: Income Statement Sales $ 31,900,000 Costs 26,351,600 Taxable income $ 5,548,400 Taxes 1,941,940 Net income $ 3,606,460 Dividends $ 1,442,584 Addition to retained earnings 2,163,876 Balance Sheet Assets Liabilities and Equity Current assets $ 7,350,000 Short-term debt $ 6,699,000 Long-term debt 5,263,500 Fixed assets 18,170,000 Common stock $ 3,026,500 Accumulated retained earnings 10,531,000 Total equity $ 13,557,500 Total assets $ 25,520,000 Total liabilities and equity $ 25,520,000 a. Calculate the external financing needed for next year. (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)
vaiue: 12.50 points The Optical Scam Company has forecast a sales growth rate of 25 percent for next year. The current financial statements are shown here Income Statement Sales Costs $ 31,900,000 26,351,600 $5,548,400 1,941,940 Taxable income Taxes Net income $3,606,460 Dividends Addition to retained earnings $ 1,442,584 2,163,876 Balance Sheet Assets Liabilities and Equity Current assets $ 7,350,000 Short-term debt Long-term debt $ 6,699,000 5,263,500 Fixed assets 18,170,000 Common stock $ 3,026,500 10,531,000 $ 13,557,500 $ 25,520,000 View site information ed earnings Total equity Total assets $25,520,000 Total liabilities and equity a. Calculate the external financing needed for next year. (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.) External financing neededExplanation / Answer
External Financing Needed (EFN)
We can use the below formula for External Financing Needed (EFN), as capacity utilization is not mentioned in question we will consider calculation require for full capacity utilization.
EFN = (Asset at current year/sales current year)* (sales forecasted - sales current year) - (Liability current year/sales current year)*(sales forecasted - sales current year) - Net profit margin*sales forecasted*Retention ratio.
Note: Liability we will use which will vary directly with sales, example account payable, but in our case it will be NIL as Balance Sheet does not have any payable.
Net profit margin = Net income/Sales = 3,606,460/31,900,000 = 0.113055
Retention ratio = Addition to retain earning/Net Income = 2,163,876/3,606,460 = 0.6
Sales Forecast = 31,900,000* 1.25 = 39,875,000
EFN = (25,520,000/31,900,000)*(39,875,000-31,900,000) - 0.113055*39,875,000*0.6
EFN = 6,380,000 – 2,704,840.875 = 3,675,159.
The below calculation is for Sustainable growth rate:-
Sustainable growth rate = ROE* Retention ratio.
ROE = Net Profit/Average Equity.
As last year Equity is not mentioned we will assume there is no addition to common stock to current year.
Last year total equity = Current year total equity – current year retain earning = 13,557,500 – 2,163,876 = 11,393,624
ROE = 3,606,460/average(13,557,500 & 11,393,624) = 3,606,460/12,475,562 = 0.28908
Sustainable growth rate = 0.28908*0.6 = 0.1734 = 17.34%
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