Chapter 3: Financial Planning and Growth
Questions and Problems:
3.1 An increase of sales to $42,300 is an increase of:
Sales increase = ($42,300 – $37,300)/$37,300
Sales increase = 0.1340 or 13.40%
Assuming costs and assets increase proportionally, the pro forma financial statements will look like this:
Pro forma income statement Pro forma Statement of Financial Position
Sales $42,300.00 Assets $144,024.13 Debt $30,500.00
Costs 29,258.45 Equity 102,272.31
EBIT $13,041.55 Total $144,024.13 Total $132,772.31
Taxes (34%) 4,434.13
Net income $8,607.43
The payout ratio is constant, so the dividends paid this year is the payout ratio from last year times net
income, or:
Dividends = ($2,500/$7,590) x $8,607.43
Dividends = $2,835.12
The addition to retained earnings is:
Addition to retained earnings = $8,607.43 – $2,835.12
Addition to retained earnings = $5,772.31
And the new equity balance is:
Equity = $96,500 + $5,772.31
Equity = $102,272.31
So the EFN is:
EFN = Total assets – Total liabilities and equity
EFN = $144,024.13 – $132,772.31
EFN = $11,251.82
3.2 The maximum percentage sales increase without issuing new equity is the sustainable growth rate.
To calculate the sustainable growth rate, we first need to calculate the ROE, which is:
ROE = NI/TE
ROE = $15,312/$81,000
ROE = 0.1890 or 18.9%
The plowback ratio, b, is one minus the payout ratio, so:
b = 1 – 0.30
Ross et al, Corporate Finance 9th Canadian Edition Solutions Manual
© 2022 McGraw-Hill Education Ltd.
3-1
, b = 0.70
Now we can use the sustainable growth rate equation to get:
Sustainable growth rate = (ROE × b)/[1 – (ROE × b)]
Sustainable growth rate = (0.1890 x 0.70)/[1 – (0.1890 x 0.70)]
Sustainable growth rate = 0.1525 or 15.25%
So, the maximum dollar increase in sales is:
Maximum increase in sales = $67,000 x 0.1525
Maximum increase in sales = $10,217.50
3.3 We need to calculate the retention ratio to calculate the sustainable growth rate. The retention ratio is:
b = 1 – 0.10
b = 0.90
Now we can use the sustainable growth rate equation to get:
Sustainable growth rate = (ROE × b)/[1 – (ROE × b)]
Sustainable growth rate = (0.15 x 0.90)/[1 – (0.15 x 0.90)]
Sustainable growth rate = 0.1561 or 15.61%
3.4 We must first calculate the ROE using the Du Pont ratio to calculate the sustainable growth rate. The ROE
is:
ROE = PM x TAT x EM
ROE = 0.081 x 1.90 x 1.25
ROE = 0.1924 or 19.24%
The plowback ratio is one minus the dividend payout ratio, so:
b = 1 – 0.30
b = 0.70
Now, we can use the sustainable growth rate equation to get:
Sustainable growth rate = (ROE × b)/[1 – (ROE × b)]
Sustainable growth rate = (0.1924 x 0.70)/[1 – (0.1924 x 0.70)]
Sustainable growth rate = 0.1556 or 15.56%
3.5 An increase of sales to $6,669 is an increase of:
Sales increase = ($6,669 – $5,700)/$5,700
Sales increase = 0.17 or 17%
Assuming costs and assets increase proportionally, the pro forma financial statements will look like this:
Ross et al, Corporate Finance 9th Canadian Edition Solutions Manual
© 2022 McGraw-Hill Education Ltd.
3-2
, Pro forma income statement Pro forma Statement of Financial Position
Sales $ 6,669 Assets $16,497 Debt $6,300
Costs 4,469 Equity 10,000
Net income $ 2,200 Total $16,497 Total $16,300
If no dividends are paid, the equity account will increase by the net income, so:
Equity = $7,800 + $2,200
Equity = $10,000
So the EFN is:
EFN = Total assets – Total liabilities and equity
EFN = $16,497 – $16,300 = $197
3.6 a. First, we need to calculate the current sales and change in sales. The current sales are next year’s sales
divided by one plus the growth rate, so:
Current sales = Next year’s sales/(1 + g)
Current sales = $420,000,000/(1 + 0.10)
Current sales = $381,818,182
And the change in sales is:
Change in sales = $420,000,000 – $381,818,182
Change in sales = $38,181,818
We can now complete the current Statement of Financial Position. The current assets, fixed assets, and
short-term debt are calculated as a percentage of current sales. The long-term debt and par value of
stock are given. The plug variable is the additions to retained earnings. So:
Assets Liabilities and equity
Current assets $76,363,636 Short-term debt $57,272,727
Long-term debt $120,000,000
Fixed assets 286,363,637 Common stock $48,000,000
Accumulated retained earnings 137,454,546
Total equity $185,454,546
Total assets $362,727,273 Total liabilities and equity $362,727,273
b. We can use the equation from the text to answer this question. The assets/sales and debt/sales are the
percentages given in the problem, so:
EFN = Assets × ΔSales – Debt × ΔSales – (PM × Projected sales) × (1 – d)
Sales Sales
Ross et al, Corporate Finance 9th Canadian Edition Solutions Manual
© 2022 McGraw-Hill Education Ltd.
3-3
