To determine: The sustainable growth rate of the given company, external funds needed for the given company, pro forma income statement, pro forma
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.
Want to see more full solutions like this?
Chapter 3 Solutions
Corporate Finance (The Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
- Mike Sanders is considering the purchase of Kepler Company, a firm specializing in the manufacture of office supplies. To be able to assess the financial capabilities of the company, Mike has been given the companys financial statements for the 2 most recent years. Required: Note: Round all answers to two decimal places. 1. Compute the following for each year: (a) return on assets, (b) return on stockholders equity, (c) earnings per share, (d) price-earnings ratio, (e) dividend yield, and (f ) dividend payout ratio. 2. CONCEPTUAL CONNECTION Based on the analysis in Requirement 1, would you invest in the common stock of Kepler?arrow_forwardHaleem trading company is a popular distributor in Salala, having operations in the entire Oman. Over these years, the company has gained a very good public opinion and quiet a big number of loyal customers. During the last year, the company has faced a serious liquidity crisis in the last year. The management of the company wants to check the liquidity ratios of the last year in order to plan for the current year. You are asked to help the management in computing the liquidity ratios. The Balance Sheet of Haleem trading company for the year ending 31-12-2020 Equity and Liabilities OMR Assets OMR Equity Share Capital Capital Reserve 8% Loan on Mortgage Creditors Bank overdraft 40,000 Plant and Machinery 8,000 Land and Buildings 32,000 Fumiture & Fixtures 16,000 Stock 18,000 Debtors Investments (Short-term) Cash in hand 24,000 40,000 16,000 14,000 14,000 4,000 14,000 Profit and Loss A/c 12,000 1,26,000 1,26,000 Choose the Current ratio and Quick ratio from the following? O a. Current…arrow_forwardHaleem trading company is a popular distributor in Salala, having operations in the entire Oman. Over these years, the company has gained a very good public opinion and quiet a big number of loyal customers. During the last year, the company has faced a serious liquidity crisis in the last year. The management of the company wants to check the liquidity ratios of the last year in order to plan for the current year. You are asked to help the management in computing the liquidity ratios. The Balance Sheet of Haleem trading company for the year ending 31-12-2020 Choose the Current ratio and Quick ratio from the following? a. Current ratio is 2.43 and Quick ratio is 1.35 b. Current ratio is 1.35 and Quick ratio is 2.40 c. Current ratio is 1.35 and Quick ratio is 2 d. Current ratio is 2 and Quick ratio is 1.35arrow_forward
- Kate is considering expanding and bringing in several employees. To do this she will need a larger facility and to purchase more equipment. Which means additional financing. Answer this: look at the financial statements as if you were a banker considering her for a loan comment on your findings and use calculations to support your answer.arrow_forwardIdentify information used in an investment decision Look forward to the daywhen you will have accumulated $5,000, and assume that you have decided to investthat hard-earned money in the common stock of a publicly owned corporation. Whatdata about that company will you be most interested in, and how will you arrangethose data so they are most meaningful to you? What information about the company will you want on a weekly basis, on a quarterly basis, and on an annual basis?How will you decide whether to sell, hold, or buy some more of the firm’s stock?arrow_forwardProvide correct solutionarrow_forward
- The specific financial aspects to be considered with your analysis are:• Profit Margin• Total Owners' Equity.• Current Ratio.• Return on Equity.• Debt Equity Ratio.• Earnings per Share.arrow_forwardYou work in the mergers and acquisitions department of a large conglomerate who is looking to invest in a retail business. Two companies, Fashion Forward and Dream Designs, are the final two options being considered. You have the most recent available income statements and two years of balance sheets for each company. Compute the following ratios for each company: Profit Margin Ratio Return on Assets Current Ratio Quick Ratio AR Turnover Ratio Average Collection Period Inventory Turnover Ratio Average Sales Period Debt to Equity Ratio For this assignment: Compute all required amounts and explain how the computations were performed Evaluate the results for each company and explain what each ratio means Compare and contrast the companies. Based on your analysis: recommend which company the organization should pursue Thoroughly support your conclusion, including what other factors should be considered Be specific. Superior papers will: Perform all calculations correctly. Articulate…arrow_forwardAthif trading company is a popular distributor in Salala, having operations in the entire Oman. Over these years, the company has gained a very good public opinion and quiet a big number of loyal customers. During the last year, the company has faced a serious liquidity crisis. The management of the company wants to check the liquidity ratios of the last year in order to plan for the current year. You are asked to help the management in computing the liquidity ratios. The Balance Sheet of Athif trading company for the year ending 31-12-2020 Equity and Liabilities OMR OMR Equity Share Capita Capital Reserve s Loan on Mortgage 40000Plant and Machinery 80o0Land and Buildings 32.000Furniture & Fixtures 16000 Stock 24,000 40,000 Creditor 12,000 Bank overdraft 12,000 Debtors investments (Short-term) 4.000 Teanh in hand 12.000 12,000 Profit and Los A/c 12,00 1,20,000 1.20,000 Choose the Current ratio and Quick ratio from the following? O a Current ratio is 1.43 and Quick ratio is 240 Ob.…arrow_forward
- Athif trading company is a popular distributor in Salala, having operations in the entire Oman. Over these years, the company has gained a very good public opinion and quiet a big number of loyal customers. During the last year, the company has faced a serious liquidity crisis. The management of the company wants to check the liquidity ratios of the last year in order to plan for the current year. You are asked to help the management in computing the liquidity ratios. The Balance Sheet of Athif trading company for the year ending 31-12-2020 Equity and Liabilities OMR Assets OMR Equity Share Capital Capital Reserve 8% Loan on Mortgage Creditors Bank overdraft 40,000 Plant and Machinery 8.000| Land and Buildings 32,000 Furniture & Fixtures 16,000 Stock 12.000 Debtors Investments (Short-term) Cash in hand 24,000 40,000 16,000 12,000 12,000 4,000 12,000 Profit and Loss A/c 12,000 1,20,000 1,20,000 Choose the Current ratio and Quick ratio from the following? O Current ratio is 1.43 and…arrow_forwardAthif trading company is a popular distributor in Salala, having operations in the entire Oman. Over these years, the company has gained a very good public opinion and quiet a big number of loyal customers. During the last year, the company has faced a serious liquidity crisis. The management of the company wants to check the liquidity ratios of the last year in order to plan for the current year. You are asked to help the management in computing the liquidity ratios. The Balance Sheet of Athif trading company for the year ending 31-12-2020 Choose the Current ratio and Quick ratio from the followingarrow_forwardChapter 14, Question 6. Attached is a similar question with answers. Please answer in the same formate for the new question :)arrow_forward
- Managerial Accounting: The Cornerstone of Busines...AccountingISBN:9781337115773Author:Maryanne M. Mowen, Don R. Hansen, Dan L. HeitgerPublisher:Cengage LearningFinancial Accounting: The Impact on Decision Make...AccountingISBN:9781305654174Author:Gary A. Porter, Curtis L. NortonPublisher:Cengage LearningPrinciples of Accounting Volume 1AccountingISBN:9781947172685Author:OpenStaxPublisher:OpenStax College
- Cornerstones of Financial AccountingAccountingISBN:9781337690881Author:Jay Rich, Jeff JonesPublisher:Cengage LearningIntermediate Accounting: Reporting And AnalysisAccountingISBN:9781337788281Author:James M. Wahlen, Jefferson P. Jones, Donald PagachPublisher:Cengage LearningFundamentals of Financial Management, Concise Edi...FinanceISBN:9781305635937Author:Eugene F. Brigham, Joel F. HoustonPublisher:Cengage Learning