Chapter 4 Classwork

Page 1 CLASSWORK TO UPLOAD CHAPTER 4 FFP Products Corp. Income Statement ($millions) Actual Actual Actual Actual Actual Projected Projected Projected Projected Projected For the year ended December 31 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 Revenue $ 1,250.0 $ 1,310.0 $ 1,365.0 $ 1,420.0 $ 1,480.0 $ 1,524.4 $ 1,570.1 $ 1,617.2 $ 1,665.8 $ 1,715.7 Growth rate n/a 4.8% 4.2% 4.0% 4.2% 3.0% 3.0% 3.0% 3.0% 3.0% Cost of goods sold 850.0 890.0 930.0 965.0 1,010.0 1,036.6 1,067.7 1,099.7 1,132.7 1,166.7 Gross profit 400.0 420.0 435.0 455.0 470.0 487.8 502.4 517.5 533.0 549.0 SG&A expenses 125.0 132.0 136.0 139.0 148.0 152.4 157.0 161.7 166.6 171.6 EBITDA 275.0 288.0 299.0 316.0 322.0 335.4 345.4 355.8 366.5 377.5 Depreciation/Amortization 50.0 52.0 55.0 58.0 60.0 61.0 62.8 64.7 66.6 68.6 EBIT 225.0 236.0 244.0 258.0 262.0 274.4 282.6 291.1 299.8 308.8 Interest Expense - - - - - - - - - - EBT 225.0 236.0 244.0 258.0 262.0 274.4 282.6 291.1 299.8 308.8 Taxes 50.0 53.0 57.0 60.0 62.0 68.6 70.7 72.8 75.0 77.2 Net Income $ 175.0 $ 183.0 $ 187.0 $ 198.0 $ 200.0 $ 205.8 $ 212.0 $ 218.3 $ 224.9 $ 231.6 Common Size Assumptions (in BLUE)/Common Size % (in BLACK) Revenue 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Revenue Growth Rate n/a 4.8% 4.2% 4.0% 4.2% 3.0% 3.0% 3.0% 3.0% 3.0% Cost of goods sold % of Revenue 68.0% 67.9% 68.1% 68.0% 68.2% 68.0% 68.0% 68.0% 68.0% 68.0% Gross profit % of Revenue 32.0% 32.1% 31.9% 32.0% 31.8% 32.0% 32.0% 32.0% 32.0% 32.0% SG&A expenses % of Revenue 10.0% 10.1% 10.0% 9.8% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% Depreciation expense % Revenue 4.0% 4.0% 4.0% 4.1% 4.1% 4.0% 4.0% 4.0% 4.0% 4.0% EBITDA MARGIN 22.0% 22.0% 21.9% 22.3% 21.8% 18.0% 18.0% 18.0% 18.0% 18.0% EBIT MARGIN 18.0% 18.0% 17.9% 18.2% 17.7% 14.0% 14.0% 14.0% 14.0% 14.0% Income Tax Rate 4.0% 4.0% 4.2% 4.2% 4.2% 25.0% 25.0% 25.0% 25.0% 25.0% Net Income Margin 14.0% 14.0% 13.7% 13.9% 13.5% 13.5% 13.5% 13.5% 13.5% 13.5% NOTE: Throughout model BLUE cells are inputs for Assumptions. BLACK are either formulas or links to other worksheets.

Page 2 CLASSWORK TO UPLOAD CHAPTER 4 FFP Products Corp. Balance Sheet - Working Capital Accounts ($millions) Actual Actual Actual Actual Actual Projected Projected Projected Projected Projected As of December 31 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 Accounts receivable $ 125.0 $ 135.0 $ 138.0 $ 150.0 $ 155.0 $ 158.7 $ 163.5 $ 168.4 $ 173.4 $ 178.6 Inventory 190.0 205.0 221.0 226.0 240.0 246.8 254.2 261.8 269.7 277.8 Accounts payable 75.0 81.0 82.0 89.0 92.0 93.7 96.5 99.4 102.4 105.5 Net working capital $ 240.0 $ 259.0 $ 277.0 $ 287.0 $ 303.0 $ 311.8 $ 321.1 $ 330.8 $ 340.7 $ 350.9 Change in W/C - source/(use) n/a (19.0) (18.0) (10.0) (16.0) (8.8) (9.4) (9.6) (9.9) (10.2) Assumptions (BLUE) Revenue (link to income statement) $ 1,250.0 $ 1,310.0 $ 1,365.0 $ 1,420.0 $ 1,480.0 $ 1,524.4 $ 1,570.1 $ 1,617.2 $ 1,665.8 $ 1,715.7 Cost of goods sold (link to IS) 850.0 890.0 930.0 965.0 1,010.0 1,036.6 1,067.7 1,099.7 1,132.7 1,166.7 Accounts receivable DSO 37 38 37 39 38 38 38 38 38 38 Inventory turnover (Cogs) 4.5 4.3 4.2 4.3 4.2 4.2 4.2 4.2 4.2 4.2 Accounts Payable Days of COGS 32 33 32 34 33 33 33 33 33 33

Actual Actual Actual Forecast Forecast Forecast 2019 2020 2021 2022 2023 2024 Revenue $ 250,000 $ 262,500 $ 278,000 $ 305,800 $ 336,380 $ 370,018 Cost of Goods Sold 185,000 195,000 207,000 227,821 250,603 273,813 Depreciation 7,500 7,875 8,340 9,174 10,091 11,101 SG&A Expenses 36,000 39,000 42,500 45,870 50,457 53,653 228,500 241,875 257,840 282,865 311,152 338,566 Operating Profit 21,500 20,625 20,160 22,935 25,229 31,452 Interest Expense 0 0 0 Pretax Profit 21,500 20,625 20,160 22,935 25,229 31,452 Tax 5,375 5,156 5,040 5,734 6,307 7,863 Net Income $ 16,125 $ 15,469 $ 15,120 $ 17,201 $ 18,921 $ 23,589 Current Assets $ 15,000 $ 18,188 $ 22,736 $ 24,464 $ 26,910 $ 29,601 Property, Plant, and Equipment - net 55,000 57,500 60,000 67,276 74,004 81,404 Other long-term assets 5,000 7,000 8,000 9,174 10,091 11,101 Total Assets 75,000 82,688 90,736 100,914 111,005 122,106 Current Liabilities 12,500 13,500 15,000 16,819 18,501 20,351 Other long-term liabilities 3,500 4,000 4,500 4,587 5,046 5,550 Total Liabilities 16,000 17,500 19,500 21,406 23,547 25,901 Debt (plug) 0 0 0 Equity 59,000 65,188 71,236 79,508 87,459 96,205 Total Liabilities and Equity $ 75,000 $ 82,688 $ 90,736 $ 100,914 $ 111,005 $ 122,106

CLASSWORK TO UPLOAD CHAPTER 4 INTERNAL/SUSTAINABLE GROWTH RATE/EXTERNAL DEBT Growth Assumption 20.0% Return on Equity Net Income $ 400,000 Shareholders' Equity CS + RE $ 2,800,000 ROE 14.3% Payout/Plowback Dividends $ 100,000 Net Income $ 400,000 Payout 25.0% Plowback 75.0% Internal growth rate Assets CA + FA $ 4,000,000 Return on assets 10.0% ROA * plowback 7.5% Internal growth rate 8.1% (ROA * plowback / (1- (ROA * plowback)) Sustainable Growth Rate ROE times 14.3% Plowback 75.0% = 10.7% (ROE * plowback / (1- (ROE * plowback)) 12.0% XYZ has the following financial information for 2018: Sales = $2,000,000 - Net Income = $400,000 - Dividends = $100,000 Current Assets = $400,000 & Fixed Assets $3,600,000 Current liabilities = $200,000 - LTD = $1,000,000 - Common Stock = $2,000,000 – Retained Earnings = $800,000 What is the sustainable growth rate? If 2019 sales are projected to be $2,400,000 (20% growth over 2018 of $2,000,000), what is the amount of external financing needed? Assume XYZ is operating at full capacity, and profit margin and payout ratio remain constant .