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Income Statements, Sustainable Growth Rate

5. Construct a pro forma income statement for the first year and second year for the following assumptions:

Units of Sales in Year 1: 110,000
Price per Unit: $11
Variable cost per unit: 30%
Fixed Costs: $125,000
Income taxes: 15%
Interest Expense: $200,000

In year 2, price per unit increases to $11.50, and unit of sales increases by 5%, all other assumptions remain the same.

6. Calculate the sustainable growth based on the following information:

- Earnings after taxes = $35,000
- Equity = $100,000
- d=22.4%

7. Calculate a table of interest rates for 5 years based on the following information:

The pure interest rate is 2%
Inflation expectations for year 1 = 3%, year 2 =4%, years 3-5 =5%
The default risk is .1% for year one and increases by .1% over each year
Liquidity premium is 0 for year 1 and increases by .2% each year
Maturity risk premium is 0 for years 1 and 2 and .3% for years 3-5

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Solution Summary

Calculating Sustainable Growth and a table of Interest using a pro-forma income statement. The soluton includes a Word document explanation and an excel worksheet to provide clarity and explanation. Specific details of a problem will assist in using this solution for other problems.

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