7/30/2019 TALLER Financial Statements
1/2
Financial statements for the
Sunset Corporation are shownbelow. Sunset forecasts thatsales
next year will be $2,200.Calculate the external fundsneeded
(EFN).
Income statement
Sales $2,000
Cost of sales 1,100
Depreciation 400
Interest 300
Tax (34%) 68
Net income $ 132
Dividends 44
Balance sheet
Currentassets
$ 500Currentliabilities
$ 165
Netfixed
assets
1,150Longterm
debt
535
Equity 950
Total $1,650 $1,650
Your Answer: 1234FeedBack:The asset/sales ratio for the Sunset
Corporation is ($1,650/$2,000) =.825. Profit margin is 6.6%, and
the payout ratio is 1/3. Currentliabilities will vary spontaneously
with sales; however, the amount oflong-term debt is under
management control and generally does notvary spontaneously. Thus,
holding long term debt constant, we can usecurrent
liabilities/sales ($165/$2,000 = .0825) as the debt/sales
ratio.External funds needed (EFN) is calculated as follows:
EFN = (Assets/Sales) x ?S - (Debt/Sales) x ?S - [p(Projected
Sales)(1 -
d)]
= (.825)($200) - (.0825)($200) - (.066)($2,200)(1 - 1/3) =
$51.70
The pro forma balance sheet is shown below. Next year's net
incomewill be $145.20 (=0.066x$2,200) and the firm will pay
dividends of$48.40.
2 NOT GRADEDSunset believes that an industry slowdown is
possible overthe next year. In this case, sales will grow 5% to
$2,100.Assume that $2,100 represents full capacity and that no
new fixed assets will be required. Calculate EFN andinterpret
your answer.Your Answer: 4567
FeedBack:In this case, sales will increase by $100 to $2,100,
just at full capacity.Current assets will increase by $25 (=
$500/$2,000 x $100) while fixedassets remain fixed. EFN is:
EFN = $25 - (.0825)($100) - (.066)($2,100)(1 - 1/3) =
-$75.65
A negative value for EFN indicates that Sunset will have a
surplus forthe year; no external financing will be required.
3 NOT GRADED
7/30/2019 TALLER Financial Statements
2/2
Assume that Sunset has sufficient excess capacity to
support a sales level of $2,100 with no new fixed
assets.Calculate EFN for projected sales of $2,200.Your Answer:
1234
FeedBack:At the full capacity sales level of $2,100, current
assets would be[($500/$2,000)($2,100)] = $525, and fixed assets
would be $1,150.
That is, at full capacity no new fixed assets are required, but
$25additional current assets are required. Total assets would thus
be$1,675. The asset/sales ratio at full capacity is ($1,675/$2,100)
=.7976, so total assets would increase proportionally with sales
for the$100 additional sales above full capacity. Thus, EFN would
be:
EFN = [25 + (.7976)$100] - (.0825)($200) - (.066)($2,200)(1 -
1/3) =
-$8.54
The pro forma balance sheet, given that sales of $2,100
represents fullcapacity, is shown below.
A negative value for EFN indicates that Sunset could finance
theincrease in sales internally; no external financing will be
required.
4 NOT GRADEDAssuming that Sunset is operating at full capacity,
what isthe maximum sales increase possible before externalfinancing
is required?Your Answer: 2345
FeedBack:Denote the maximum sales level as ($2,000 + x). We can
solve for x bysetting EFN equal to zero:
EFN = (.825)(x) - (.0825)(x) - (.066)($2,000 + x)(1 -1/3) =
0
Solving for x, we get x = $125.98, and a sales level of
$2,125.98. This
implies that sales could grow by 6.3% before any new financing
isrequired. This is not the maximum sustainable growth rate,
however,because the debt/equity ratio will decline in this case.
This happensbecause retained earnings increases while borrowing
remainsunchanged. (See the next problem)
5 NOT GRADEDAssume that no new equity will be sold, the
dividendpayout is fixed, and the debt/equity ratio is fixed; what
isSunset's maximum sustainable growth rate? In answering,assume
that the debt/equity ratio is based on total debt.Your Answer:
6%
FeedBack:The debt/equity ratio (L) is .7368 (=$700/$950), the
asset/sales ratio(T) is .825, the dividend payout ratio (d) is 1/3
(=$44/$132), and the
profit margin (p) is 6.6% . The maximum sustainable growth rate
is:
?S/So = p(1 - d)(1 + L)/[T - p(1 - d)(1 + L)]
= [.066(2/3)(1.7368)]/[.825 - (.066)(2/3)(1.7368)] = 10.21%
