If projected sales growth is actually 6.50%, Calculate the EFN. (Refer to Exhibits 19.10 and 19.11.) Exhibit 19.11EFN = (Growth rate x Initial assets) – Addition to retained eamingsExternal FundingNeeded (EFN) andGrowth for EmpireEnterprisesThe exhibit graphicallyillustrates Equation 19.6,showing the connectionbetween growth rate insales and EFN. Thehorizontal axis plots thefirm's projected growthrate, and the vertical axisplots EFN. The upwardslope of the line illustrateshow external financingincreases with the growthrate, assuming that thedividend policy is heldA positive EFNmeans that the firmmust find extemalAt some growth rate(9.6% for EmpireEnterprises), EFN - 0.funding to financeits growth.$5.29.6%20%Projected Growth Rate-$4.8-At low growth rates, EFN isnegative (EFN < 0), and thefirm has surplus funds.constant.External Funding Needed ($) Exhibit 19.10Empire Enterprises: Pro Forma Income Statement and Balance Sheet ($ millions)Income StatementNet sales$ 120.0Costs108.0Net income$ 12.0Dividends7.2Additions to retained earnings$4.8Balance SheetAssetsLiabilities and Stockholders' EquityChangeChangeAssets$ 60.0$ 10.0Total debt$ 20.0$0.0Equity34.84.8$ 54.8$ 5.2Total assets$ 60.0$ 10.0Total liabilities and stockholder's equity$ 4.8External financing needed (EFN)$ 5.2The pro forma balance sheet for Empire Enterprises does not balance, and the difference is the amount of EFN. Becausethe company's board does not wish to issue common stock, the funding will have to take the form of long-term debt.

Formulas: EFN/(Excess cash) = (Initial assets*Growth rate) - Retained earnings

Exhibit 19.10 Empire Enterprises: Pro Forma Income Statement and Balance Sheet ($ millions) Income Statement Net sales $ 120.0 108.0 $ 12.0 $ 72 $ 48 Costs Net income Dividends Additions to retained earnings Balance Sheet Assets Liabilities and Stockholders' Equity Change Change Assets $ 60.0 $ 10.0 Total debt $ 20.0 $0.0 Equity 34.8 4.8 5 60.0 S 10.0 Total labilities and stodckholder's equity S 54.8 External financing needed (EFN) Total assets $4.8 $ 5.2 $5.2 The pro forma balance sheet for Empire Enterprises does not balance, and the difference is the amount of EFN. Because the company's board does not wish to issue common stock, the funding will have to take the form of long-term debt.

Exhibit 19.10 Empire Enterprises: Pro Forma Income Statement and Balance Sheet ($ millions) Income Statement Net sales $ 120.0 108.0 $ 12.0 $ 72 $ 48 Costs Net income Dividends Additions to retained earnings Balance Sheet Assets Liabilities and Stockholders' Equity Change Change Assets $ 60.0 $ 10.0 Total debt $ 20.0 $0.0 Equity 34.8 4.8 5 60.0 S 10.0 Total labilities and stodckholder's equity S 54.8 External financing needed (EFN) Total assets $4.8 $ 5.2 $5.2 The pro forma balance sheet for Empire Enterprises does not balance, and the difference is the amount of EFN. Because the company's board does not wish to issue common stock, the funding will have to take the form of long-term debt.

Survey of Accounting (Accounting I)

8th Edition

ISBN:9781305961883

Author:Carl Warren

Publisher:Carl Warren

Chapter15: Capital Investment Analysis

Section: Chapter Questions

Problem 15.3.1P

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