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Q. No.

Ex-1
2
3
Prob-1
2
3
4
5
6
7
8
9

Topic Covered
Statement of sources and uses of funds, cash flow statement
Cash budget, determination of additional borrowing and performa balance sheet
Sustainable growth rate ratios
Clasification of BS & P&L items as sources or uses of funds
Statement of sources and uses of funds, cash flow statement and statement of working capital
Statement of sources and uses of funds and statement of working capital
Prepration of cash budget
Prepration of BS and IS using various ratios
Prepration of cash budget
Prepration of promorma income statement using cash budget
Sustainable growth rate ratios
Computation of various components of sustainable growth rate by altering standard formula

Q1Serap Jones, had the following financial statements for 20X1 and 20X2:
a- Prepare a source and use of funds on cash basis
b- Prepare an accounting statement of cash flows
c- Evaluate your finds
20X1
Assets
Cash and Equivalents
Accounts Receivable
Inventories
Current Assets
Net Fixed Assets
Total Assets

Liabilities and Equities

140,000
346,000
432,000
918,000
1,113,000
2,031,000

20X2
31,000
528,000
683,000
1,242,000
1,398,000
2,640,000

Accounts payables
Accruals
Bank Borrowings
Current Liabilities
Common Stock
Retained Earnings
Total

413,000
226,000
100,000
739,000
100,000
1,192,000
2,031,000

627,000
314,000
235,000
1,176,000
###
1,364,000
2,640,000

Note: Depreciation was 189,000 for 20X2 and no dividends were paid.

Ans1a-

Serap Jones
Statement of Sources and uses of funds
Sources of Funds
Funds provided by operation
Net Profit
Depreciation

172,000 Addition in fixed assets


189,000
361,000

Increase in Accounts Payable


Increase in Bank Borrowings
Increase in Accruals
Decrease in Cash

214,000 Addition in Inventories


135,000 Addition in Receivables
88,000
109,000
907,000

(W-1)
Addition in Fixed assets
Depreciation

285,000
189,000
474,000

Ans1b-

Serap Jones
Accounting Statement of Cash Flows
Cash Flows from Operating Activities
Net profit
Adjustments to reconcile earnings to net cash provided

by operating activities
Add:
Depreciation
Changes in Current Assets and Current Liabilities
Increase in Accounts receivable
Increase in Inventories
Increase in Accounts Payable
Increase in Accruals
Net Cash Flows from Operating Activities (a)
Cash Flows from Investing Activities (b)
Increase in fixed assets
Cash Flows from Financing Activities ( C )
Increase in short-term borrowing
Net Cash flows from operating, investing and financing activities
Add: cash and cash equivalents at the beginning of the year
Cash and Cash equivalent at the end of the year

Ans1cThe company has had substantial capital expenditure and increase in


accounts receivables and inventories. To finance this growth, which is
greatly in excess of the growth in equity base, the company has leaned
on the trade, has increased its accruals, and has increased its bank
borrowings significantly. This has not been enough; there was a draw
down in the cash position. The financing is short-term in nature but, it
is being used mostly for long-term build up in assets.

nts for 20X1 and 20X2:

Uses of Funds

ition in fixed assets

(W-1)

474,000

ition in Inventories
ition in Receivables

251,000
182,000

907,000

172,000

189,000
-

182,000
251,000
214,000
88,000
230,000

474,000

135,000
109,000
140,000
31,000

iture and increase in


this growth, which is
e company has leaned
increased its bank
h; there was a draw
term in nature but, it

Q2-

Consider the balance sheet of Rodriguez Malting Company at December 31 (i


thousands). The company has received a large order and anticipate the need
go its bank to increase its borrowings. As a result, it has to forecast its cash
requirements for January, February, and March. Typically, the company collec
20 percent of its sales, in the month of sales, 70 percent in the subsequent m
and 10 percent in the second month after the sale. Al sales are credit sales.
Cash
Accounts Receivable
Inventories
Current Assets
Net Fixed Assets

50
530
545
1,125
1,836

Total Assets

2,961

Purchase of raw materials to produce malt are made in the month prior to the
to 60 percent of sales in the subsequent month. Payments for these purchase
month after the purchase. Labour costs, including overtime, are expected to
January, $200,000 in February, and $160,000 in March. Selling, administrativ
cash expenses are expected to be $100,000 per month for January through M
in November and December and projected sales for January through April are

November
December

500 January
600 February

On the basis of this information:

a- prepare a cash budget for the months of January, February, and March.
b- Determine the amount of additional bank borrowings necessary to maintai
balance of$50,000 all times
c- Prepare a proforma balance sheet for March, 31.

Ans2a-

Rodriguez Malting Company


Cash Budget
Sales
Cash Receipts
20% in the month of sale

Nov
500

Dec
600

70% in the subsequent month


10% in the second month
Total Cash Receipts
Cash disbursements
Purchases
Payments for purchases
Labor costs
Sell, admin, & taxes

360

Total Cash disbursements


Receipts less disbursements
Ans2b-

Month
Jan
Feb
Mar

The amount of financing peaks in February owing to the need to pay for purc
the previous month and higher labour costs. In March, substantial collections
on the prior month's billings, causing a large net cash inflows sufficient payoff
borrowings.
Ans2cProforma Balance Sheet
March 31
Cash
Accounts Receivable (W-1)
Inventories (W-3)
Current Assets
Net Fixed Assets

50
620
635
1,305
1,836

Total Assets

(W-1)

(W-2)

Workings
Accounts Receivable
March
February

3,141

(650 X 0.8)
(1000 X 0.1)

Retained Earnings prior year balance

Sales
Less: payment for Purchases
Less: Labour costs
All Other Expenses

(W-3)

Opening Balance
Purchases (Total Pur - Total Payment , Jan - Mar)
Closing Balance Inventories

g Company at December 31 (in


order and anticipate the need to
lt, it has to forecast its cash
Typically, the company collects
0 percent in the subsequent month,
ale. Al sales are credit sales.
Accounts Payable
Bank Loans
Accruals
Current Liabilities
Long-term debt
Common Stock
Retained Earnings

360
400
212
972
450
100
1,439

Total Liabilities and Equity

2,961

made in the month prior to the sale an amount


. Payments for these purchases occur in the
ng overtime, are expected to be $150,000 in
March. Selling, administrative, taxes and other
r month for January through March. Actual Sales
s for January through April are as follows (in thousands).

600
1,000

March
April

650
750

uary, February, and March.


rowings necessary to maintain a cash

Jan
600

Feb
1,000

Mar
650

120

200

130

Apr
750

420
50

420
60

700
60

590

680

890

600
360
150
100

390
600
200
###

450
390
160
100

610

900

650

220

240

20 -

1,440
1,350
90

Add. Borrow
Cumm. Borrow.
20
420
220
640
240
400

ng to the need to pay for purchases made


March, substantial collections are made
t cash inflows sufficient payoff additional

Accounts Payable (Pur. Mar)


Bank Loans
Accruals
Current Liabilities
Long-term debt
Common Stock
Retained Earnings (W-2)
Total Liabilities and Equity

520
100
620
1,439

450
400
212
1,062
450
100
1,529
3,141

2,250
1,350
510
300
1,529
545
90
635

Q3-

Zippo Industry has equity capital of$12 million, total debt of $8 million, and s
last year of $30 million.

a- It has target assets-to-sales ratio of .6667, a target profit margin of .04, a d


-to-equity ratio of .6667, and a target earnings retention rate of .75. In stead
what is its sustainable growth rate?

b- Suppose now. For next year, the company has a target assets-to-sales ratio
a target net profit of .05, and a target debt-to-equity ratio of .80. It wishes to
annual dividend of $3 million and rise $1 million in equity capital next year.
What is the sustainable growth rate for next year? Why does it differ from tha
Ans3aSustainable Growth Rate

b X (NP/S) X (1+ D/E)


(A/S) -(b X (NP/S) X (1+ D/E)

Where,

= 0.75 X (0.04) X (1 +0.6667)


= 0.6667-(0.75 X (0.04) X (1 +0.666

b = Retention Ration
NP/S = Net Profit divided by Sales
D/E = is the ratio of debt and equity
A/S = is the ratio of Assets to Sales

0.050001
0.616699
8.11%

Sustainable Growth Rate

(E0 +E1 - DIV) X (1+D/E)X (S/A)


1- (NP/S) X (1+D/E)X (S/A)

Where,
E0 =
E1

= (12 + 1 -0. 3) X(1+0.8) X (1/.62)


Old Equity

New Equity
Div =
Dividend
NP/S = Net Profit divided by Sales
D/E = is the ratio of debt and equity
S/A = is the ratio of Sales to Asset

= (1- (0.05) X (1+0.8) X (1/.62)

= 36.87097 X 0.0333
0.854839
= 43.13208 X 0.03333
1.437592
43.76%

The company has moved from steady state with higher target operating
efficiency, a higher debt ratio, the sale of common stock. All of these things

permit a high rate of growth in sales next year. Unless further changes in
these directions occur, the SGR will decline in future years.

tal debt of $8 million, and sales

get profit margin of .04, a debttention rate of .75. In steady state,

a target assets-to-sales ratio of .62,


ity ratio of .80. It wishes to pay an
n equity capital next year.
Why does it differ from that in part a ?

NP/S) X (1+ D/E)

5 X (0.04) X (1 +0.6667)
-(0.75 X (0.04) X (1 +0.6667)

) X (1+D/E)X (S/A)

X (1/S)

-1

1+D/E)X (S/A)

0. 3) X(1+0.8) X (1/.62)
X (1+0.8) X (1/.62)

-1

-1
-1

t operating
of these things

X 1/30

-1

r changes in

Prob1-

Galow Fish canning Company reports the following changes from the precedin
year end. Categorize each change as a source of fund or a use of fund.

Item
Cash
Accounts Receivable
Inventory
Gross fixed assets
Depreciation
Accounts Payable
Accruals
Long-term debt
Net Profits
Dividends

Change
-100
700
-300
900
1000
300
-100
-200
600
400

Ans1Item
Cash
Accounts Receivable
Inventory
Gross fixed assets
Depreciation
Net Fixed Asset
Accounts Payable
Accruals
Long-term debt
Net Profits
Dividends

Change Classification
-100 The residual
700 Use
-300 Source
900
-1000
-100 Source
300 Source
-100 Use
-200 Use
600 Source
400 Use

es from the preceding


a use of fund.

Prob2Kohn Corporation comparative balance sheet December, 31 ( in millions):

Assets
2 Cash
Accounts Receivable
Inventories
Fixed Assets, net
Other assets

Total assets

20X1
5
15
12
50
8

90

20X2

Liabilities and Equity


3 Notes Payable
22 Accounts Payable
15 Accrued Wages
55 Accrued Taxes
5 Long-term debt
Common Stock
Retained Earnings
100 Total Liabilities and equity

Kohn Corporation Income statement and Retained Earnings year ended Dece

Net Sales
Expenses
Cost of Goods Sold
Selling, general, and administrative
Depreciation
Interest
Net income before taxes
Less: Taxes
Net income
Add: Retained earnings at 12/31/X1
Subtotal
Less: Dividends
Retained Earnings at 12/31/X2

a- Prepare a source and use of funds on cash basis for 20X2 for the Kohn Corp
b- Prepare an accounting statement of cash flows.
c- Prepare a source and use of working capital statement for 20X2.

Ans2a-

Kohn Corporation
Statement of Sources and uses of funds
Sources of Funds
Funds provided by operation
Net Profit
Depreciation

7 Addition in fixed assets


5
12

Increase in Accounts Payable


Increase in accrued taxes
Decrease in other assets
Increase in long-term debt
Increase in common Stock
Decrease in cash

3
2
3
15
6
2
43

Addition in Inventories
Addition in Receivables
Decrease in Notes Payable
Issuance of dividends

(W-1)
Addition in Fixed assets
Depreciation

5
5
10

Ans2a-

Kohn Corporation
Statement of Cash Flows
Net profit
Adjustments to reconcile earnings to net cash provided
Depreciation
Changes in Current Assets and Current Liabilities
Increase in Accounts Payable
Increase in accrued taxes
Increase in Inventories
Increase in Receivables

3
2
-3
-7

Net Cash Flows from Operating Activities (a)

Cash Flows from Investing Activities


Investments in fixed assets
Increase in other assets
Cash Flows from Investing Activities (b)

-10
3
-7

Cash Flows from Financing Activities


Increase in long-term debt
Increase in common Stock
Issuance of dividends
Decrease in Notes Payable

15
6
-3
-20

Cash Flows from Financing Activities ( C )

-2

Net Cash Flow (a +b+c)


Add: cash and cash equiv. at the beginning of the year
Cash and Cash equivalent at the end of the year

-2
5
3

Ans2a-

Kohn Corporation
Statement of Sources and uses of Working Capital
Sources of Funds
Funds provided by operation
Net Profit
Depreciation
Decrease in other assets
Increase in long-term debt
Increase in common Stock

7 Dividends
5
3 Addition to plant
15 Increase in Working Capital
6
36

ember, 31 ( in millions):

iabilities and Equity

20X1

20X2

otes Payable
ccounts Payable
ccrued Wages
ccrued Taxes
ong-term debt
ommon Stock
etained Earnings

20
5
2
3
0
20
40

0
8
2
5
15
26
44

otal Liabilities and equity

90

100

d Earnings year ended December, 31 20X2

48,000,000
25,000,000
5,000,000
5,000,000
2,000,000

37,000,000
11,000,000
4,000,000
7,000,000
40,000,000
47,000,000
3,000,000
44,000,000

s for 20X2 for the Kohn Corporation.

tement for 20X2.

Uses of Funds

Addition in fixed assets

Addition in Inventories
Addition in Receivables
Decrease in Notes Payable
ssuance of dividends

(W-1)

10

3
7
20
3

43

Uses of Funds

Dividends

Addition to plant
ncrease in Working Capital

3
10
23
36

Prob3Financial Statements for Sennet Corporation follow:


20X1 20X2
Cash
Accounts Receivable
Inventories
Current assets
Net Plant

4
7
12
23
40

Total assets

63

20X1 20X2

5 Accounts Pay
10 Notes Payabl
15 Accrued Wag
30 Accrued Taxe
40
Current
Long-term de
Common Sto
Retained Ear
70 Total Liabilit

Net Sales
Cost of Goods Sold
Selling,general,andadministrative expenses
Depreciation
Interest
Net income before taxes
Taxes
Net income

8
5
2
3
18
20
10
15
63

10
5
3
2
20
20
10
20
70

95
50
15
3
2

70
25
10
15

a- Prepare a source and use of funds for Sennet.


b- Prepare a source and use of working capital.

Ans3a-

Sennet Corporation
Statement of Sources and uses of funds
Sources of Funds

Uses of Funds

Funds provided by operation


Net Profit
Depreciation

Increase in Accounts Payable


Increase in wages

15 Addition in Invento
3
3 Addition in Receiv
3
18 Decrease in Accrue
1
Addition in Fixed a
3
2 Dividends (balanci 10
1 Increase in Cash
1
21

21

(W-1)
Addition in Fixed assets
Depreciation

3
3

Ans3b-

Sennet Corporation
Statement of Sources and uses of Working Capital
Sources of Funds
Funds provided by operation
Net Profit
Depreciation

Current assets
Current liabilities
Working Capital
Increase in Working Capital

Uses of Funds

15 Dividends
3
Addition to plant
Increase in Workin

10

18

18

20X1 20X2
23
30
18
20
5
10
5

3
5

Prob4-

Prepare the cash budget for ACE Manufacturing Company indicating rec
disbursements for May, June, and July. The firm wishes to maintain a cas
balance of $20,000 at all times. Determine whether or not borrowing wi
necessary during the period, and if it is when and for how much. As of A
the firm had a balance of $20,000 in cash.
Actual Sales
January
February
March
April

Forecasted Sales
50,000
50,000
60,000
60,000

May
June
July
August

Accounts Receivable: 50 percent of the total sales are for cash. The re
50 percent will be collected equally during the following 2 months (the
a negligible bad debt loss)
Cost of goods manufactured: 70 percent of sales, 90 percent of this
the first month after incurrence, the remaining 10 percent is paid in the
Sales and administrative expenses: $10,000 per month plus 10 per
expenses are paid in the month of incurrence.
Interest payments: Semiannual interest of $18,000 is paid during July
in sinking-fund payment is also made at that time.
Dividends: A $10,000 dividend payment will be declared and made in
Capital Expenditure: $40,000 will be invested in plant and equipment
Taxes: Income tax payment of $1,000 will be made in July.
Ans4ACE Manufacturing Company
Cash Budget
Jan
Sales
50,000

Feb
50,000

Cash Receipts
Cash Sales
Credit Sales
50% Apr in May and Jun
50% May in June & July
50% Jun in July & Aug

Mar
60,000

Apr
60,000

30,000

30,000
15,000

Total Cash Receipts

Cash Payments
Cost of Good Manufactured
90% Payment of goods manufactured

42,000

42,000
37,800

10% Payment of goods manufactured


Sales and Administrative expenses
Interest Payments
Sinking fund payments
Dividends
Capital Expenditure
Taxes
Total Cash Payments
Net Cash Flows
Beg. Cash Balance
End. Cash Balance
without financing
Cumulative Borrowings
End. Cash Bal. after borrow.

ompany indicating receipts,


shes to maintain a cash
er or not borrowing will be
for how much. As of April 30,

Forecasted Sales
70,000
80,000
100,000
100,000

es are for cash. The remaining


owing 2 months (the firm incurs

es, 90 percent of this cost is paid during


percent is paid in the following month.
per month plus 10 percent of sales. All

000 is paid during July. An annual $50,000

declared and made in July.


n plant and equipment in June.

May
70,000

Jun
80,000

Jul
100,000

Aug

35,000
15,000
15,000

40,000
15,000
17,500

50,000

50,000

20,000

###

65,000

72,500

17,500
20,000
87,500

49,000

56,000

70,000

70,000

37,800

44,100

50,400

63,000

4,200
17,000

4,200
18,000

4,900
20,000
18,000
50,000
10,000

40,000
59,000

106,300

1,000
154,300

6,000 -

33,800 -

66,800

20000

26,000 -

7,800

7,800 -

74,600

26,000 -

27,800
20,000

94,600
20,000

5,600

Prob5-

Downeast Nautial Company expects sales of $2.4 million next year and expec
sales of the same amount the following year. Sales are spread evenly through
the year. On the basis of the following information, prepare a proforma balan
sheet and income statement for year end:

Cash
Accounts Receivable
Inventories
Net fixed assets
Accounts payable
Accruals
Bank borrowing
Long-term debt
Common Stock
Retained Earnings
Net profit margin

=
=
=
=
=
=
=
=
=
=
=

minimum of 4 percent of annual sales


60-day average collection period based
turnover of 8 times a year
$500,000 now; capital expenditure are e
1 month's purchase
3 percent of sales
$50,000 now; can borrow up to $250,00
$300,000; $75,000 are payable at year e
$100,000; no additions planned
$500,000 now
8 percent of sales

Dividends
Cost of goods sold
Purchases
Income Taxes

=
=
=
=

none
60 percent of sales
50 percent of cost of goods sold
50 percent of before-tax profit

Ans5Downeast Nautical Company


Income Statement
Sales
Cost of Goods Sold (60% of 2.4M)
Gross Profit
Depreciation (Balancing Figure)
Profit before taxes
Taxes (50% of before tax)
Net Profit (8% of Sales)
Dividend
Retained Profit for the year
Retained Earnings beginning balance
Retained profit at year end

2,400,000
1,440,000
960,000
576,000
384,000
192,000
192,000
192,000
500,000
692,000

Downeast Nautical Company


Balance Sheet
Assets
Cash
Accounts receivable (W-1)
Inventory
(W-2)
Current Assets
Net Fixed Assets
Total Assets

Liabilities and Equity


Accounts Payable
(W-3)
Accruals (8% of Sales)
Bank Borrowings (Bal. Fig)
Current Liabilities
Long-Term debt (300-75)

96,000
400,000
180,000
676,000
500,000
1,176,000

60,000
72,000
27,000
159,000
225,000

Common Stock
Retained Earnings
Total Liabilities and Equity

100,000
692,000
1,176,000

Workings W-1
1Sales
2345= 1/4

Days in year
Turnover in days
Accounts Receivable Turnover
Accounts Receivable
W-2
Cost of Goods Sold
Inventory Turnover Ratio
Inventory

2,400,000
360
60
6
400,000

1,440,000
8
180,000

W-3
Cost of Goods Sold
Purchases 50% of COGS
Accounts Payable (720,000/12)

next year and expects


pread evenly throughout
re a proforma balance

nt of annual sales
ection period based on annual sales

tal expenditure are equal to depreciation.

orrow up to $250,000
are payable at year end
ons planned

f goods sold
-tax profit

1,176,000
-

1,440,000
720,000
60,000

Prob6Given the Information that follows, for Central City Department Store
for the first 6 months of 20X2 under the following assumptions:
a- All prices and costs remain constant.
b- Sales are 75 percent for credit and 25 percent for cash.
c- In terms of credit sales, 60 percent are collected in the month after the
sales, 30 percent in the second month and 10 percent in the third. Bad debt
loses are insignificant.
d- Sales, actual and estimated:

October 20X1
November 20X1
December 20X1
January 20X1
February 20X1

300,000
350,000
400,000
150,000
200,000

e- payments for purchases and merchandise are 80 percent of the following mo


anticipated sales.
d- Wages and salaries are:
January
February

30000
40000

March
April

f- Rent is $2,000 a month.


g- Interest of $7,500 is due at the end of each calendar quarter.
h-A tax prepayment on 20X2 income of $50,000 is due in April.
i- A capital investment of $30,000 is planned in June.
j- The company has a cash balance of $100,000 at December, 31 20X1.
which is the minimum desired level for cash. Funds can be borrowed in
multiples of $5,000 on a monthly basis. (Ignore tax on such borrowings.)

Ans6-

Central City Department Store


Cash Budget
Oct
Sales
300,000
Credit Sales 75%
Cash Receipts

225,000

Nov
350,000

Dec
400,000

262,500

300,000

Cash Sales 25%


60%
30%
10%
Total Cash Receipts

Cash Payments
Purchases
Wages and salaries
Rent
Interest
Tax Prepayment
Capital Expenditure

75,000

87,500
135,000

100,000
157,500
67,500

75,000

222,500

325,000

280,000

320,000

120,000

Total Cash Payments


Net Cash Flow
Cash Opening Balance
Cash Closing Balance without financing
Cumulative borrowing
Cash Closing Balance after financing

Fawrwa No.

34663261

rtment Store

e month after the


the third. Bad debt

March 20X2
April 20X2
May 20X2
June 20X2
July 20X2

200,000
300,000
250,000
200,000
300,000

ent of the following month's

50000
50000

May
June

40000
35000

mber, 31 20X1.
be borrowed in
uch borrowings.)

Jan
150,000

Feb
200,000

Mar
200,000

Apr
300,000

May
250,000

112,500

150,000

150,000

225,000

187,500

37,500
180,000
78,750
22,500

50,000
67,500
90,000
26,250

50,000
90,000
33,750
30,000

75,000
90,000
45,000
11,250

62,500
135,000
45,000
15,000

318,750

233,750

203,750

221,250

257,500

160,000
30,000
2,000
-

160,000
40,000
2,000
-

240,000
50,000
2,000
7,500
-

200,000
50,000
2,000
50,000
-

160,000
40,000
2,000
-

192,000

202,000

299,500

302,000

202,000

80,750

55,500

162,750
82,000
20,000
102,000

82,000
137,500

126,750

31,750 -

95,750 -

100,000
226,750

226,750
258,500

258,500
162,750

226,750

258,500

162,750

137,500

June
200,000

July
300,000

150,000

225,000

50,000
112,500
67,500
15,000

75,000
90,000
56,250
22,500

245,000

243,750

240,000
35,000
2,000
7,500
30,000
314,500
-

69,500
137,500
68,000
35,000
103,000

Prob7Use the cash budget worked out in problem 6 and with the following
additional information prepare a proforma income statement for the
first half of 20X2 for the Central City Department Store.
a- Inventory at December, 31 20X1 was $200,000.
b- Depreciation is taken on straight line basis on $250,000 of assets with
an average remaining life of 10 years and no salvage value. It is recorded
as an operating expense apart from cost of goods sold.
c- tax rate is 40 percent.

Ans7Sales (Jan to June)


Cost of Goods Sold (Dec to May)
Gross Profit
Operating Expenses
Wages and salaries
Rent
Interest
Depreciation

Operating Loss
Taxes 40%
After Tax loss

6 and with the following


come statement for the
ment Store.

s on $250,000 of assets with


salvage value. It is recorded
oods sold.

1,300,000
1,040,000
260,000
245,000
12,000
15,000
12,500
284,500
-

24,500
9,800
14,700

Prob8Liz Clarison Industries has $40 million in shareholders' equity and sales of
$150 million last year.

a- its target ratios are asset-to-sales ratio, .40 net profit margin, .07; debt-toequity ratio, .50; and earnings retention , .60. if these ratios respond to stead
state, what is its sustainable growth rate?

b- If instead of these ratios, what would be sustainable growth rate next year
the company moved from steady state and had the following targets? Asset-t
ratio, .42, net profit margin, .06, debt-to-equity ratio, .45, dividend of $5 milli
and no new equity financing.

Ans8aSustainable Growth R =

b X (NP/S) X (1+ D/E)


(A/S) -(b X (NP/S) X (1+ D/E)

Where,
b = Retention Ration
NP/S = Net Profit divided by Sales
D/E = is the ratio of debt and equity
A/S = is the ratio of Assets to Sales

= 0.6 X (0.07) X (1 +0.5)


= 0.4-(0.6 X (0.07) X (1 +0.5)
=

0.063
0.337
18.69%

Sustainable Growth R =

(E0 +E1 - DIV) X (1+D/E)X (S/A)


1- (NP/S) X (1+D/E)X (S/A)

Where,
E0 =
E1

= (40 + 0 -5) X(1+0.45) X (1/.42)


Old Equity

New Equity
Div =
Dividend
NP/S = Net Profit divided by Sale
D/E = is the ratio of debt and equity
S/A = is the ratio of Sales to Asset

= (1- (0.06) X (1+0.45) X (1/.42)

= 120.8333 X 0.00667 -1
0.792857
= 152.4024 X 0.00667 -1
1.016524 -1
1.65%

Moving to lower relatively profitability and a lower debt ratio, which may be a one
shot occurrence, lowers dramatically the sustainable growth rate. The change is debt
affects the level of overall assets, not just the growth component.

ders' equity and sales of

profit margin, .07; debt-tohese ratios respond to steady

nable growth rate next year if


he following targets? Asset-to-sales
tio, .45, dividend of $5 million;

X (1+ D/E)

07) X (1 +0.5)
(0.07) X (1 +0.5)

X (1/S)

-1

2.380952

/E)X (S/A)

1+0.45) X (1/.42)

X 1/150

-1

+0.45) X (1/.42)

0.006667 -1

, which may be a one


rate. The change is debt

Prob9-

Hildbranch Hydronics Corporation wishes to achieve a 35 percent increase in


next year. Sales last year were $30 million, and the company has equity capi
$12 million. It intends it raise a $.5 million in new equity by sale of stock to o
No dividend is planned. Tentatively, the company has set the following target
assets-to-sales ratio, .67; net profit margin, .08; and debt to equity ratio, .60.
The company has determined that these ratios are not sufficient to produce a
in sales of 35 percent.

a- Holding the other two target ratios constant, what asset-to-sales ratio wou
b- Holding the other two ratios constant, what net profit margin would be nec
c- Holding the other two ratios constant, what debt-to-equity ratio would be n

Ans9aSustainable Growth Rate =

S/A =

b X (NP/S) X (1+ D/E)


(A/S) -(b X (NP/S) X (1+ D/E)

(1+SGR X S)
1+D/E (E0 +E1 - Div+(NP/S) X (1+SGR) X S

=
=

1.35 X 30
1.6 X (12+0.5-0)+(0.08X1.35X30)
40.5
1.608164
25.184
A/S
= 1/A/S
=1/1.60816
= 0.62183

Ans9bNP/S =
=
=
=

Ans9c-

1
(1+D/E) X(S/A)
1
(1+.6) X1/.67)
1
2.3880597015
0.41875
=

11.01%

D/E

(1+SGR) X S
E0 + E1 -Div + (NP/S X 1+SGR XS) X (1/A/S)

1.35 X 30
((12+.5) +(0.08 X 1.35 X 30 )X (1/.67)

40.5
-1
23.49254

1.723952 -1

0.724

35 percent increase in sales


ompany has equity capital of
ity by sale of stock to officers.
set the following targets:
debt to equity ratio, .60.
t sufficient to produce a growth

asset-to-sales ratio would be necessary?


fit margin would be necessary ?
-equity ratio would be necessary?

) X (1+ D/E)

S) X (1+SGR) X S

=1/1.60816

Eq0 + Eq1 - Div


1+SGR X S
5+0.12-0
1.35X 30
12.5
40.5
0.308642

-1

-1