Chapter 29 Financial Planning 785
bre44380_ch29_759-786.indd 785 10/06/15 09:53 AM
Income Statement
Sales $950
Costs 250
Pretax income $700
Taxes (at 28.6%) 200
Net income $500
Balance Sheet, Year-End
2017 2016 2017 2016
Net assets $3,000 $2,700 Debt $1,000 $ 900
Equity 2,000 1,800
Total $3,000 $2,700 Total $3,000 $2,700❱ TABLE 29.18^ Financial statements for Eagle Sport
Supply, 2017. See Problem 24.- Forecast growth rate
a. What is the internal growth rate of Eagle Sport (see Problem 24) if the dividend payout
ratio is fixed at 60% and the equity-to-asset ratio is fixed at two-thirds?
b. What is the sustainable growth rate?
- Forecast growth rate Bio-Plasma Corp. is growing at 30% per year. It is all-equity-financed
and has total assets of $1 million. Its return on equity is 20%. Its plowback ratio is 40%.
a. What is the internal growth rate?
b. What is the firm’s need for external financing this year?
c. By how much would the firm increase its internal growth rate if it reduced its payout rate
to zero?
d. By how much would such a move reduce the need for external financing? What do you
conclude about the relationship between dividend policy and requirements for external
financing?
CHALLENGE
- Long-term plans Table 29.19 shows the 2016 financial statements for the Executive Cheese
Company. Annual depreciation is 10% of fixed assets at the beginning of the year, plus 10%
of new investment. The company plans to invest a further $200,000 per year in fixed assets
for the next five years and net working capital is expected to remain a constant proportion
of fixed assets. The company forecasts that the ratio of revenues to total assets at the start of
each year will remain at 1.75. Fixed costs are expected to remain at $53, and variable costs at
80% of revenue. The company’s policy is to pay out two-thirds of net income as dividends and
to maintain a book debt ratio of 20%.
a. Construct a model for Executive Cheese like the one in Tables 29.9 to 29.11.
b. Use your model to produce a set of financial statements for 2017.