Solutions to Questions and Problems
24. The pro forma income statements for all three growth rates will be:
EURO RAIL TOURS INC.
We will calculate the EFN for the 15 percent growth rate first. Assuming the payout ratio is constant, the dividends paid will be:
Dividends = (€42,458/€106,145)(€123,988) Dividends = €49,595
And the addition to retained earnings will be:
Addition to retained earnings = €123,988 – 49,595 Addition to retained earnings = €74,393
The new accumulated retained earnings on the pro forma balance sheet will be:
New accumulated retained earnings = €257,000 + 74,393 New accumulated retained earnings = €331,393
The pro forma balance sheet will look like this:
15% Sales Growth:
EURO RAIL TOURS INC.
Pro Forma Balance Sheet
Assets Liabilities and Owners’ Equity
Current assets Current liabilities
Cash € 28,750 Accounts payable € 74,750
Accounts receivable 49,450 Notes payable 9,000
Inventory 87,400 Total € 83,750
Total € 165,600 Long-term debt 156,000
Fixed assets
Net plant and Owners’ equity
equipment 418,600 Common stock and
paid-in surplus € 21,000 Retained earnings 331,393
Total € 352,393
Total liabilities and owners’
Total assets € 584,200 equity € 592,143
So, the EFN is:
EFN = Total assets – Total liabilities and equity EFN = €584,200 – 592,143
EFN = –€7,943
At a 20 percent growth rate, and assuming the payout ratio is constant, the dividends paid will be:
Dividends = (€42,458/€106,145)(€129,935) Dividends = €51,974
And the addition to retained earnings will be:
Addition to retained earnings = €129,935 – 51,974 Addition to retained earnings = €77,961
The new accumulated retained earnings on the pro forma balance sheet will be:
New accumulated retained earnings = €257,000 + 77,961 New accumulated retained earnings = €334,961
The pro forma balance sheet will look like this:
20% Sales Growth:
EURO RAIL TOURS INC.
Pro Forma Balance Sheet
Assets Liabilities and Owners’ Equity
Current assets Current liabilities
Cash € 30,000 Accounts payable € 78,000
Accounts receivable 51,600 Notes payable 9,000
Inventory 91,200 Total € 87,000
Total € 172,800 Long-term debt 156,000
Fixed assets
Net plant and Owners’ equity
equipment 436,800 Common stock and
paid-in surplus € 21,000 Retained earnings 334,961
Total € 355,961
Total liabilities and owners’
Total assets € 609,600 equity € 598,961
So, the EFN is:
EFN = Total assets – Total liabilities and equity EFN = €609,600 – 598,961
EFN = €10,639
At a 25 percent growth rate, and assuming the payout ratio is constant, the dividends paid will be:
Dividends = (€42,458/€106,145)(€135,883) Dividends = €54,353
And the addition to retained earnings will be:
Addition to retained earnings = €135,883 – 54,353 Addition to retained earnings = €81,530
The new accumulated retained earnings on the pro forma balance sheet will be:
New accumulated retained earnings = €257,000 + 81,530 New accumulated retained earnings = €338,530
The pro forma balance sheet will look like this:
25% Sales Growth:
EURO RAIL TOURS INC.
Pro Forma Balance Sheet
Assets Liabilities and Owners’ Equity
Current assets Current liabilities
Cash € 31,250 Accounts payable € 81,250
Accounts receivable 53,750 Notes payable 9,000
Inventory 95,000 Total € 90,250
Total € 180,000 Long-term debt 156,000
Fixed assets
Net plant and Owners’ equity
equipment 455,000 Common stock and
paid-in surplus € 21,000
EFN = Total assets – Total liabilities and equity EFN = €635,000 – 605,780
EFN = €29,221
25. The pro forma income statements for all three growth rates will be:
EURO RAIL TOURS INC.
Sales €1,086,000 €1,176,500 €1,221,750
Costs 852,000 923,000 958,500
Other expenses 14,400 15,600 16,200
Under the sustainable growth rate assumption, the company maintains a constant debt-equity ratio.
The D/E ratio of the company is:
D/E = (€156,000 + 74,000) / €278,000 D/E = .82734
At a 20 percent growth rate, and assuming the payout ratio is constant, the dividends paid will be:
Dividends = (€42,458/€106,145)(€129,935) Dividends = €51,974
And the addition to retained earnings will be:
Addition to retained earnings = €129,935 – 51,974 Addition to retained earnings = €77,961
The new accumulated retained earnings on the pro forma balance sheet will be:
New accumulated retained earnings = €257,000 + 77,961 New accumulated retained earnings = €334,961
The new total debt will be:
New total debt = .82734(€334,961) New total debt = €294,500
So, the new long-term debt will be the new total debt minus the new short-term debt, or:
New long-term debt = €294,500 – 87,000 New long-term debt = €207,500
The pro forma balance sheet will look like this:
Sales growth rate = 20% and Debt/Equity ratio = .82734:
EURO RAIL TOURS INC.
Pro Forma Balance Sheet
Assets Liabilities and Owners’ Equity
Current assets Current liabilities
Cash € 30,000 Accounts payable € 78,000
Accounts receivable 51,600 Notes payable 9,000
Inventory 91,200 Total € 87,000
Total € 172,800 Long-term debt 207,500
Fixed assets
Net plant and Owners’ equity
equipment 436,800 Common stock and
paid-in surplus € 21,000 Retained earnings 334,961
Total € 355,961
Total liabilities and owners’
Total assets € 609,600 equity € 650,461
So, the EFN is:
EFN = Total assets – Total liabilities and equity EFN = €609,600 – 650,461
EFN = –€40,861
At a 30 percent growth rate, and assuming the payout ratio is constant, the dividends paid will be:
Dividends = (€42,458/€106,145)(€141,830) Dividends = €56,732
And the addition to retained earnings will be:
Addition to retained earnings = €141,830 – 56,732 Addition to retained earnings = €85,098
The new accumulated retained earnings on the pro forma balance sheet will be:
New accumulated retained earnings = €257,000 + 85,098 New accumulated retained earnings = €342,098
The new total debt will be:
New total debt = .82734(€342,098) New total debt = €300,405
So, the new long-term debt will be the new total debt minus the new short-term debt, or:
New long-term debt = €300,405 – 93,500 New long-term debt = €206,905
Sales growth rate = 30% and debt/equity ratio = .82734:
EURO RAIL TOURS INC.
Pro Forma Balance Sheet
Assets Liabilities and Owners’ Equity
Current assets Current liabilities
Cash € 32,500 Accounts payable € 84,500
Accounts receivable 55,900 Notes payable 9,000
Inventory 98,800 Total € 93,500
Total € 187,200 Long-term debt 206,905
Fixed assets
Net plant and Owners’ equity
equipment 473,200 Common stock and
paid-in surplus € 21,000 Retained earnings 342,098
Total € 363,098
Total liabilities and owners’
Total assets € 660,400 equity € 663,503
So, the EFN is:
EFN = Total assets – Total liabilities and equity EFN = €660,400 – 663,503
EFN = –€3,103
At a 35 percent growth rate, and assuming the payout ratio is constant, the dividends paid will be:
Dividends = (€42,458/€106,145)(€147,778) Dividends = €59,111
And the addition to retained earnings will be:
Addition to retained earnings = €147,778 – 59,111 Addition to retained earnings = €88,667
The new accumulated retained earnings on the pro forma balance sheet will be:
New accumulated retained earnings = €257,000 + 88,667 New accumulated retained earnings = €345,667
The new total debt will be:
New total debt = .82734(€366,667) New total debt = €303,357
So, the new long-term debt will be the new total debt minus the new short-term debt, or:
New long-term debt = €303,357 – 96,750 New long-term debt = €206,607
Sales growth rate = 35% and debt/equity ratio = .82734:
EURO RAIL TOURS INC.
Pro Forma Balance Sheet
Assets Liabilities and Owners’ Equity
Current assets Current liabilities
Cash € 33,750 Accounts payable € 87,750
Accounts receivable 58,050 Notes payable 9,000
Inventory 102,600 Total € 96,750
Total € 194,400 Long-term debt 206,607
Fixed assets
Net plant and Owners’ equity
equipment 491,400 Common stock and
paid-in surplus € 21,000 Retained earnings 345,667
Total € 366,667
Total liabilities and owners’
Total assets € 685,800 equity € 670,024
So the EFN is:
EFN = Total assets – Total liabilities and equity EFN = €685,800 – 670,024
EFN = €15,776