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CHAPTER 3 B - 1
13. a. The equation for external funds needed is:
EFN =
Sales
Assets
× ΔSales –
Sales
debt sSpontaneou
× ΔSales – (PM × Projected sales) × (1 – d)
where:
Assets/Sales = $42,850,000/$31,600,000 = 1.3560
ΔSales = Current sales × Sales growth rate = $31,600,000(.18) = $5,688,000
Spontaneous debt/Sales = $5,150,000/$31,600,000 = .1630
so:
EFN = (1.3560 × $5,688,000) – (.1630 × $5,688,000) – (.1430 × $37,288,000) × (1 – .3210)
b. The current assets, fixed assets, and short-term debt will all increase at the same percentage as
sales. The long-term debt and common stock will remain constant. The accumulated retained
earnings will increase by the addition to retained earnings for the year. We can calculate the
addition to retained earnings for the year as:
Accumulated retained earnings = $26,900,000 + 3,619,650
Accumulated retained earnings = $30,519,650
The pro forma balance sheet will be:
Assets
Liabilities and equity
Current assets
$12,685,000
Short-term debt
$6,077,000
Long-term debt
$7,700,000
Fixed assets
37,878,000
Common stock
$3,100,000
Accumulated RE
30,519,650
CHAPTER 3 B - 2
Total equity
$33,619,650
Total assets
$50,563,000
Total liabilities and equity
$47,396,650
Sustainable growth rate = (ROE × b)/[1 – (ROE × b)]
where:
ROE = Net income/Total equity = $4,517,500/$30,000,000 = .1506
So:
Assets
Liabilities and equity
Current assets
$12,685,000
Short-term debt
$6,077,000
Long-term debt
$7,700,000
Fixed assets
37,878,000
Common stock
$3,100,000
Accumulated retained earnings
32,230,650
Total equity
$35,330,650
Total assets
$50,563,000
Total liabilities and equity
$49,107,650
The EFN is:
EFN = Total assets – Total liabilities and equity
increase its asset utilization and/or its profit margin. The company could also increase the debt
in its capital structure. This will decrease the equity account, thereby increasing ROE.
14. This is a multi-step problem involving several ratios. It is often easier to look backward to determine
where to start. We need receivables turnover to find days’ sales in receivables. To calculate receivables
CHAPTER 3 B - 3
turnover, we need credit sales, and to find credit sales, we need total sales. Since we are given the
profit margin and net income, we can use these to calculate total sales as:
PM = .074 = NI/Sales
.074 = $263,000/Sales
Sales = $3,554,054
Credit sales are 80 percent of total sales, so:
Credit sales = $3,554,054(.80)
Receivables turnover = Credit sales/Accounts receivable
Receivables turnover = $2,843,243/$165,700
Receivables turnover = 17.16 times
assets equal total assets. So, if we find the current assets and the total assets, we can solve for net fixed
assets. Using the numbers given for the current ratio and the current liabilities, we solve for current
assets:
Current ratio = Current assets/Current liabilities
1.25 = Current assets/$1,215
find the sales using the profit margin:
Profit margin = Net income/Sales
.0750 = Net income/$9,360
CHAPTER 3 B - 4
Substituting the total equity into the equation and solving for long-term debt gives the following:
1 + $4,588.24/LTD = 2.222
LTD = $4,588.24/1.222
Total debt = Current liabilities + Long-term debt
Total debt = $1,215 + 3,754.01
Total debt = $4,969.01
And, with the total debt, we can find the total debt and equity, which is equal to total assets:
Total assets = Total debt + Total equity
Total assets = $4,969.01 + 4,588.24
Net income = (1 – TC)EBT
Plugging in the numbers given and solving for EBT, we get:
Net income = (1 – TC)EBT
$21,460 = (1 – .34)EBT
EBT = $32,515.15
Current ratio = Current assets/Current liabilities
1.25 = Current assets/$263,000
Current assets = $328,750
Using the quick ratio, we can solve for inventory:
Quick ratio = (Current assets – Inventory)/Current liabilities
.75 = ($328,750 – Inventory)/$263,000
$17,928/$517,952 = .0346, or 3.46%
This means that cash is 3.46% of total assets.
The common-base year answers are found by dividing each category value for 2017 by the same
Total assets
$517,952
100%
$600,135
100.00%
1.1587
Liabilities and Owners' Equity
Current liabilities
Accounts payable
$25,192
4.86%
$32,198
5.37%
1.2781
Notes payable
32,379
6.25%
39,476
6.58%
1.2192
Total
$57,571
11.12%
$71,674
11.94%
1.2450
Long-term debt
$46,200
8.92%
$70,000
11.66%
1.5152
Owners' equity
Common stock
$55,000
10.62%
$55,000
9.16%
1.0000
Accumulated RE
359,181
69.35%
403,461
67.23%
1.1233
Total
$414,181
79.97%
$458,461
76.39%
1.1069
Total L&E
$517,952
100%
$600,135
100.00%
1.1587
19. To determine full capacity sales, we divide the current sales by the capacity the company is currently
using, so:
Full capacity sales = $905,000/.92
Full capacity sales = $983,696
Full capacity ratio = Fixed assets/Full capacity sales
Full capacity ratio = $895,000/$983,696
Full capacity ratio = .9098
Next, we calculate the total dollar amount of fixed assets needed at the new sales figure.
will look like this:
RETRO MACHINE INC.
Pro Forma Income Statement
Sales $ 713,520
CHAPTER 3 B - 7
Costs 555,240
Other expenses 14,640
EBIT $ 143,640
Dividends = ($28,792/$71,981)($87,542)
Dividends = $35,016
RETRO MACHINE INC.
Pro Forma Balance Sheet
Assets Liabilities and Owners’ Equity
Net plant and Owners’ equity
equipment 334,536 Common stock and
paid-in surplus $ 95,000
Retained earnings 173,206
Total $ 268,206
Total liabilities and owners’
EFN = Total assets – Total liabilities and equity
EFN = $440,766 – 454,872
EFN = $14,106
CHAPTER 3 B - 8
22. First, we need to calculate full capacity sales, which is:
Full capacity sales = $594,600/.85
Full capacity sales = $699,529
The full capacity ratio at full capacity sales is:
Full capacity ratio = Fixed assets/Full capacity sales
Full capacity ratio = $278,780/$699,529
Full capacity ratio = .39853
D/E = .7575
So the new total debt amount will be:
New total debt = .7575($268,206)
New total debt = $203,169
This is the new total debt for the company. Given that our calculation for EFN is the amount that must
be raised externally and does not increase spontaneously with sales, we need to subtract the
CHAPTER 3 B - 9
Pro Forma Balance Sheet
Assets Liabilities and Owners’ Equity
Current assets Current liabilities
Cash $ 20,484 Accounts payable $ 55,080
Accounts receivable 29,472 Notes payable 11,480
Inventory 70,380 Total $ 66,560
Total $ 120,336 Long-term debt 136,609
Fixed assets
Net plant and Owners’ equity
equipment 334,536 Common stock and
paid-in surplus $ 95,000
Retained earnings 173,206
Assets Liabilities and Owners’ Equity
Current assets Current liabilities
Cash $ 20,484 Accounts payable $ 55,080
Excess cash 16,502
Accounts receivable 29,472 Notes payable 11,480
Inventory 70,380 Total $ 66,560
Total $ 136,838 Long-term debt 136,609
Fixed assets
CHAPTER 3 B - 10
Debt/assets = .7575/(1 + .7575) = .43
Equity/assets = 1/(1 + .7575) = .57
So, the amount of debt and equity needed will be:
Assets Liabilities and Owners’ Equity
Current assets Current liabilities
Cash $ 20,484 Accounts payable $ 55,080
Accounts receivable 29,472 Notes payable 11,480
Inventory 70,380 Total $ 66,560
Total $ 120,336 Long-term debt 129,496
Fixed assets
Net plant and Owners’ equity
equipment 334,536 Common stock and
paid-in surplus $ 95,000
Retained earnings 163,816
Total $ 258,816
Total liabilities and owners’
