To determine: The sustainable growth rate of the given company, external funds needed for the given company, pro forma income statement, pro forma balance sheet at sustainable growth rate and the financial ratios.
Sustainable Growth Rate:
It refers to the maximum growth that a company can have without using external funds or increasing the financial leverage of the company.
External Funds:
It refers to the funds that have been provided to the business or company from outside. These funds could be for short term, that is, for a period of less than 1 year or long term, that is, for the period of more than 1 year, which is decided on the basis of need of the funds.
Financial Ratios:
It refers to the measure of comparing and investing the relationships between different aspects of financial information.
Explanation of Solution
Solution:
Given,
Company ECY has recently employed Person DE to provide assistance in the short-term financial planning and the financial performance of the company. Person LW, the founder of Company ECY has provided the below information to Person DE in order to start his analyses:
Inventory of the company is $6,627,300.
Current assets of the company are $15,823,700.
Current liabilities of the company care $21,320,300.
Sales of the company are $210,900,000.
Total assets of the company are $117,304,900.
Cost of goods sold is $148,600,000.
Accounts receivables of the company are $5,910,800.
Total debt of the company is
EBIT of the company is $30,229,000.
Interest of the company is $3,791,000.
Net income of the company is $15,862,800.
Total equity of the company is $59,584,600.
The formula to calculate sustainable growth rate is,
ROE refers to
Where d is the dividend payout ratio.
Substitute 26.62% for ROE and 30% for d in the above formula.
The sustainable growth of the company is 22.90 or 23%.
Pro forma income statement when growth rate is 23% is,
E.C Company Pro forma Income Statement | |
Particulars | Amount |
Sales
|
259,407,000 |
Cost of goods sold
|
(182,778,000) |
Other expenses
|
(30,986,160) |
(6,879,000) | |
Earnings before interest and taxes (EBIT) | 38,763,840 |
Interest | (3,791,000) |
Taxable income | 34,972,840 |
Taxes (40%) | (13,989,136) |
Net Income | 20,983,704 |
Dividends
|
(6,295,111) |
Addition to |
14,688,593 |
Table (1)
Pro forma balance sheet is,
E.C Company Pro forma Balance Sheet ($ in millions) | |
Assets | Amount |
Current Assets | |
Cash
|
4,041,288 |
Accounts Receivable
|
7,270,284 |
Inventory
|
8,151,579 |
Total Current Assets | 19,463,151 |
Fixed Assets | |
Net plant and equipment
|
124,821,876 |
Total Assets | 144,285,027 |
Liabilities and Owners’ Equity | |
Current Liabilities | |
Accounts payable
|
8,582,571 |
Notes payable
|
17,641,398 |
Total Current Liabilities | 26,223,969 |
Long Term Debts | 36,400,000 |
Owner’s Equity | |
Common Stock | 5,580,000 |
Retained Earnings
|
66,427,872 |
Total liabilities and owners’ equity | 134,631,841 |
Table (2)
The formula to calculate additional funds needed is,
Substitute $144,285,027 for total assets and $134,631,841for total liabilities and equity in the above formula.
External funds needed are $9,653,186 million.
The formula to calculate current ratio is,
Substitute $19,463,151 for current assets and $22,925,171 for current liabilities in the above formula.
Current ratio of the company is 0.85.
The formula to calculate quick ratio is,
Substitute $19,463,151 for current assets, $8,151,579 for inventory and $22,925,171 for current liabilities.
Quick ratio of the company is 0.49.
The formula to calculate asset turnover ratio is,
Substitute $259,407,000 for sales and $120,944,351 for total assets in the above formula.
Asset turnover ratio is 2.14.
The formula to calculate inventory turnover ratio is,
Substitute $182,778,000 for cost of goods sold and $8,151,579 in the above formula.
Inventory turnover ratio is 22.42.
The formula to calculate receivable turnover ratio is,
Substitute $259,407,000 for sales and $7,270,284 for accounts receivable in the above formula.
Receivable turnover ratio is 35.68.
The formula to calculate debt ratio is,
Substitute
Debt ratio of the company is 0.49.
The formula to calculate debt equity ratio is,
Substitute $59,325,171 for total debt and $73,239,784.48
Debt equity ratio of the company is 0.81.
The formula to calculate equity multiplier is,
Substitute $120,944,351 for total asset and $73,239,748.48 for total equity in the above formula.
Equity multiplier is 1.65.
The formula to calculate interest coverage ratio is,
Substitute $37,181,670 for EBIT and $4,662,930 for interest in the above formula.
Interest coverage ratio of the company is 7.97.
The formula to calculate profit margin is,
Substitute $19,511,244 for net income and $259,407,000 in the above formula.
The formula to calculate
Substitute $19,511,244 for net income and $120,944,351 for total asset.
Return on asset is 16.13%.
The formula to calculate return on equity is,
Substitute $19,511,244 for net income and $73,239,748.48 for total equity in the above formula.
Return on equity of the company is 26.64%.
The formula to calculate dividend payout percentage is,
Substitute $4,759,301 for dividend and $15,862,800 for net income in the above formula.
Dividend payout ratio of the company is 30%.
The formula to calculate retention payout percentage is,
Substitute $4,759,301 for dividend and $15,862,800 for net income in the above formula.
Retention payout ratio of the company is 70%.
Thus, the ratios those are dependent on the fixed asset, long term liabilities or common stock are changed due to the growth level of the company and rest ratios are same.
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Chapter 3 Solutions
CORPORATE FINANCE (LL)-W/ACCESS
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