Consider the following recent financials for XYZ Corporation

Consider the following recent financials for XYZ Corporation:

Income Statement

Balance Sheet

Sales

63,252

Assets

122,852

Debt

28,164

Costs

37,951

Equity

94,688

EBIT

25,301

Taxes @ 38%

9,614

Total

122,852

Total

122,852

Net Income

15,687

Assets and costs are proportional to sales. Debt and equity are not. A dividend of $2,918 was paid, and the company wishes to maintain a constant payout ratio. Next year’s sales are projected to grow by 20%.

What is the pro-forma value for equity? (Round answer to 2 decimal places. Do not round intermediate calculations).

What is the external financing needed using the pro-forma approach? (Round answer to 2 decimal places. Do not round intermediate calculations).

What is the internal growth rate? (Report answer in percentage terms and round to 2 decimal places. Do not round intermediate calculations).

What is the sustainable growth rate? (Report answer in percentage terms and round to 2 decimal places. Do not round intermediate calculations).

Solution

Proforma value of equity = $110,011

External financing required = $9,076 ($37,240 - $28,164)

Internal growth rate = 11.61%

Sustainable growht rate = 3.52%

Workings:

Sales will increase by 20%. Costs are 60% of sales and assets are 194% of sales. Hence we take these percentages for the proforma workings. The tax rate will be same.