First, use data to compute the company's pro forma income statement and balance sheet accounts, assuming a 40% tax rate.
Sales
$46,298,115.00
Retained earnings
$12,717,254.00
Other expenses
$5,870,865.00
Notes Payable
$2,439,553.00
Net PP&E
$20,381,945.00
Long-term debt
$6,300,000.00
Inventory
$1,235,161.00
Interest
$725,098.00
Dividends
$705,000.00
Depreciation
$2,074,853.00
Common stock
$460,000.00
COGS
$34,536,913.00
Cash
$524,963.00
Accounts Receivable
$843,094.00
Accounts Payable
$1,068,356.00
You are required to do the following tasks with the pro forma income statement and balance sheet.
1- Calculate the internal growth rate and sustainable growth rate for the company. What do these numbers mean?
2- The company plans to grow by 12% next year at full capacity. Calculate EFN and determine if sales can support growth.
3- Most assets can be increased as a percentage of sales. For instance, cash can be increased by any amount. However, fixed assets must be increased in specific amounts because it is impossible, as a practical matter, to buy part of a new plant or machine. In this case, a company has a “staircase” or “lumpy” fixed cost structure. Assume the company is currently producing at 100 percent capacity. As a result, to increase production, the company must set up an entirely new line at a cost of $5,000,000. Calculate the new EFN with this assumption. What does this imply about capacity utilization for the company next year?