| Income Statement | |||||
| Sales | $43,000,000 | Taxes: | 40% | ||
| COGS | $30,000,000 | ||||
| Other expenses | $5,000,000 | Shares Outstanding | 1,000,000 | ||
| Depreciation | $2,000,000 | Market-to-Book Ratio | 1.25 | ||
| EBIT | $6,000,000 | Depreciation of New Assets | 25.00% | ||
| Interest | $2,000,000 | Dividend growth in the last 7 years | 8.00% | ||
| Taxable income | $4,000,000 | ||||
| Taxes (40%) | $1,600,000 | ||||
| Net income | $2,400,000 | ||||
| Dividends | $600,000 | ||||
| Add to RE | $1,800,000 | ||||
| Balance Sheet | |||||
| Assets | Liabilities & Owners’ Equity | ||||
| Current Assets | Current Liabilities | ||||
| Cash | $500,000 | Accounts Payable | $1,000,000 | ||
| Accounts Receivable | $1,000,000 | Notes Payable | $3,000,000 | ||
| Inventory | $2,000,000 | Total CL | $4,000,000 | ||
| Total CA | $3,500,000 | Long Term Debt | $10,000,000 | ||
| Fixed Assets | Owners’ Equity | ||||
| Net PP&E | $25,000,000 | Common Stock | $6,500,000 | ||
| Retained Earnings | $8,000,000 | ||||
| Total Equity | $14,500,000 | ||||
| Total Assets | $28,500,000 | Total L & OE | $28,500,000 | ||
One of your analysts mentioned that the Marketing and Sales departments are forecasting a growth in sales of 10%. Additionally, the same analyst informed you that the firm is at capacity right now and any further growth would require an investment in fixed assets of $5 million dollars. Before your meeting with the new CEO, you decided to get a sense of what the impact of such growth would be:
(c) What is the EFN for a growth of 10% in sales and the capacity assumption above? Also assume that the dividend payout ratio remains constant, and that cost of goods sold, current assets and accounts payable grow proportionally to sales.
(d) What does the number you computed mean?
(e) Suppose you decide to raise any needed capital through long term debt with no interest payments in the coming year. What is your new Debt-Equity Ratio? Is it larger or smaller than the Debt-Equity Ratio you currently have? Does it contradict the numbers for the IGR or the SGR you computed before? Why is that?
