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External funding needed

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Equivalency of the External Funds Needed (EFN) equation and pro-formas:

TACA International
Balance sheet and Income Statement Information:
Balance Sheet
December 31, 2002
Assets:
Current Assets $500 Short Term Debt $300
Fixed Assets $550 Long Term Debt $200
Total Assets $1050 Equity $550
Total Liab. & Equity $1050

Income Statement
December 31, 2002
Sales Revenue $1200
NIAT $ 100
Dividends $ 40

Assume sales are projected to rise by 20% for the year 2003. Net profit margin on sales and dividend payout ratios will remain constant. The only assets that are spontaneous (rise proportionally with sales) are current assets, and the only liabilities that are spontaneous (rise proportionally with sales) are current liabilities.

a) Use the EFN equation to generate an estimate of the amount of additional, external funding the firm will require in 2003
b) Develop pro-forma income statements and balance sheets for the year 2003. Your pro-formas should show only the same accounts shown above (they obviously do not need to be detailed). Clearly show the plug number which makes your pro-forma balance sheet balance.
c) Compare the plug number in part (b) with the EFN estimate in part (a).

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Solution:
A) Projected sales =Sales for the year 2002 120% =$1200*120% =$1440
Net profit margin ratio = NIAT /Sales = $100/$1200 = 8.33%
Dividend payout ratio = Dividend / NIAT = $40/$100 =40%
Expected profit = Projected sales net profit margin = $1440 *8.33% = $120
Expected dividend =Expected Profit *Dividend payout ratio = $120* 40% =$48
Addition to retained earnings = ...

Solution Summary

Word document contains EFN equation,pro-forma income statements and balance sheets Tthe plug number which makes pro-forma balance sheet balance is clearly shown.

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The Optimal Scam Company would like to see its sales grow at 20 percent for the foreseeable future.

The Optimal Scam Company would like to see its sales grow at 20 percent for the foreseeable future. Its financial statements for the current year are presented below.

Income Statement Balance Sheet
($ millions) ($ millions)
Sales 32.00 Current assets 16
Costs 28.97 Fixed assets 16
Gross profit 3.03 Total assets 32
Taxes 1.03
Net income 2.00 Current debt 10
Long-term debt 4
Dividends 1.40 Total debt 14
Retained earnings 0.60 Common stock 14
Ret. earnings 4
Total liabilities and equity 32

WHAT DETERMINES GROWTH?
The current financial policy of the Optimal Scam Company includes
Dividend-payout ratio (d) 70%
Debt-to-equity ratio (L) 77.78%
Net profit margin (P) 6.25%
Assets-sales ratio (T) 1

a. Determine Optimal Scam's need for external funds next year.
b. Construct a pro forma balance sheet for Optimal Scam.
c. Calculate the sustainable growth rate for the Optimal Scam Company.
d. How can Optimal Scam change its financial policy to achieve its growth objective?

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