Extra Credit
Mid-Term Assignment
Finance 8310, Holland
1.
Calculate the Internal Growth Rate and Sustainable Growth Rate from year 2000
to Pro Forma 2001 using the attached Income Statement and Balance Sheet.
Assume Notes Payable is part of the financing for this firm, and use the normal
Accounting format for these financial statements (as presented in the attached
sheet).
2.
Prepare Pro Forma 2001 financial statements assuming that all items on the
Income Statement, all the assets, and A/P maintain the same relationship with
sales. Notes Payable should be considered a financing account. Also, assume no
external financing will be used (only internally generated cash will be used for
growth). Use the Internal Growth Rate you calculated in Problem 1 as the
assumed growth rate in sales. First, determine any External Financing Need, and
then balance the accounts if necessary with a change in the Cash account on the
Balance Sheet.
3.
Calculate the Internal Growth Rate again, but this time use the managerial balance
sheet. Recall that the only difference is that current liabilities other than true
financing accounts should be included on the left side of the balance sheet as part
of Net Working Capital and are subtracted from Current Assets (in this case,
Notes Payable should be considered as a financing account, not as a current
liability). In your calculation of IGR, only the Total Assets number (which will
be smaller in the managerial balance sheet format) will change in your calculation
of ROA. Then repeat Problem 2 with all the same assumptions, but with a
different growth rate -- use the managerial balance sheet IGR. Again, determine
any External Financing Need, and then balance the accounts if necessary with a
change in the Cash account on the Balance Sheet.
4.
Repeat Problem 2, except in this case use the Sustainable Growth Rate you
calculated in Problem 1 as the growth rate in sales. Also, add to the Long-Term
Debt account a sufficient amount to keep the debt to equity ratio constant (as
before, no new equity is allowed). Again, determine any External Financing
Need, and then balance the accounts if necessary with a change in the Cash
account on the Balance Sheet.
5.
Repeat Problem #3 using the same Internal Growth Rate calculated with the
Managerial Balance Sheet data and the same assumptions as in Problem #3. In
this case, however, the only changes are to assume that interest and depreciation
remain constant. Calculate any External Financing Need, and then balance the
accounts if necessary with a change in the Cash account on the Balance Sheet.
6.
Repeat Problem #3 using the same Internal Growth Rate calculated with the
Managerial Balance Sheet data and the same assumptions as in Problem #3. In
this case, however, the only changes are to assume that the Net Fixed Assets are
currently being utilized at 93% of their effective capacity. (Do not include any
assumptions from Problem #5). Calculate any External Financing Need, and then
balance the accounts if necessary with a change in the Cash account on the
Balance Sheet.
Income Statement
2000
Sales
Cost of Goods Sold
SG&A
Depreciation
EBIT
Interest
EBT
Taxes
Net Income
500
260
80
40
120
20
100
34
66
Dividends
Additions to RE
12
54
Balance Sheet
12-31-00
Current Assets
Cash
A/R
Inventory
Total
PP&E
Acc. Depreciation
Net Fixed Assets
Total Assets
10
80
150
240
610
250
360
600
Current Liabilities
A/P
Notes Payable
Total
Long-Term Debt
Common Stock
Retained Earnings
Total L&SE
80
20
100
200
150
150
600