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Percentage of Sales Models and Required External Financing

(Complete problem set found in attachment)

9. Percentage of Sales Models. Here are the abbreviated financial statements for Planners
Peanuts:

INCOME STATEMENT, 2003
Sales $ 2,000
Cost 1,500
Net income $ 500

BALANCE SHEET, YEAR-END
2002 2003 2002 2003
Assets $ 2,500 $ 3,000 Debt $ 833 $ 1,000
Equity 1,667 2,000
Total $ 2,500 $ 3,000 Total $ 2,500 $ 3,000

If sales increase by 20 percent in 2004, and the company uses a strict percentage of sales planning model (meaning that all items on the income and balance sheet also increase by 20 percent), what must be the balancing item?
What will be its value?

The balancing item will be equity , its value = 2400

10. Required External Financing. If the dividend payout ratio in problem 9 is fixed at 50 percent, calculate the required total external financing for growth rates in 2004 of 15 percent, 20 percent, and 25 percent.
Income Statement 2002 2003 2004 / 15% 2004 / 20% 2004 / 25%
Revenue 2000 2300 2400 2500
COGS 1500 1725 1800 1875

Taxes
Net Income 500 575 600 625
Dividends 250 287.5 300 312.5
Retained Earnings 250 287.5 300 312.5

Balance Sheet
Assets 2500 3000 3450 3600 3750

Liabilities and Equity 2500 3000 3450 3600 3750
Debit 833 1000 1150 1200 1250
Equity 1667 2000 2300 2400 2500

Required External Fianancing 200 350 500

11. Feasible Growth Rates. What is the maximum possible growth rate for Planners Peanuts (see problem 9) if the payout ratio remains at 50 percent and

a. no external debt or equity is to be issued
Internal growth rate = retained earnings / assets
= 250 / 3000 = 0.833333 (2003)

b. the firm maintains a fixed debt ratio but issues no equity
Sustainable growth rate = (retained earnings (1 + D/E)) / (debt + equity) = 0.0636746

(Complete problem set found in attachment)

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9. Percentage of Sales Models. Here are the abbreviated financial statements for Planners
Peanuts:

INCOME STATEMENT, 2003
Sales $ 2,000
Cost 1,500
Net income $ 500

BALANCE SHEET, YEAR-END
2002 2003 2002 2003
Assets $ 2,500 $ 3,000 Debt $ 833 $ 1,000
Equity 1,667 2,000
Total $ 2,500 $ 3,000 Total $ 2,500 $ 3,000

If sales increase by 20 percent in 2004, and the company uses a strict percentage ...

Solution Summary

This explains the application of Percentage of Sales Models to calculate the required external financing

$2.19