Optimal Scan: Sustainable Growth Rate
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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 ($ millions) Balance Sheet ($ 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
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
Determine Optimal Scam's need for external funds next year.
Construct a pro forma balance sheet for Optimal Scam.
Calculate the sustainable growth rate for the Optimal Scam Company.
How can Optimal Scam change its financial policy to achieve its growth objective?
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Solution Summary
The solution explains the calculation of sustainable growth rate
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Since you are making a projection for one year in the future it is reasonable to assume that fixed costs do not change. Thus, if sales grow 20%, then net income will grow 20%. Net income is $2,000,000(1.2) = $2,400,000.
Determine total uses of funds.
The increase in net working capital is growth rate (current assets - current liabilities)
NWC = 0.20 ($16,000,000 - $10,000,000) = $1,200,000
The increase in fixed assets is growth rate X existing ...
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