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Projected ROE & Future Forecast/After AFN

You have been given the attached information on the Crum Company. Crum expects sales to grow by 25 percent in 2007 and operating costs should increase in proportion to sales. Fixed assets were being operated at 70 percent of capacity in 2006, but all other assets were used to full capacity. Underutilized fixed assets cannot be sold. Current assets and spontaneous liabilities should increase in proportion to sales during 2007. The company plans to finance any external funds needed as 35 percent notes payable and 65 percent common stock. The interest rate is 8 percent and interest expense is based on the debt level at the beginning of the year (cash earns no interest income). The dividend payout ratio will remain constant, irrespective of how many shares of stock are outstanding. What is Crum's projected ROE? (Ignore any financing feedback effects).

Information on the Crum Company (dollars in thousands):

2006 2007 Forecast 2007 After AFN

Sales 1200.00
Operating Costs 975.00
EBIT 225.00
Interest 18.00
EBT 207.00
Taxes (35%) 72.00
Net Income 135.00
Dividends (60%) 81.00
Add'n to R.E. 54.00

Current Assets 700.00
Net fixed assets 300.00
Total Assets 1000.00

A/P and Accruals 125.00
N/P 225.00
Common stock 150.00
Retained earnings 500.00
Total Liab & Equity 1000.00

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Solution Summary

The solution explains how to determine the amount of additional funds needed (AFN) and the projected ROE