Question

Please- only typewritten answers, no handwritten answers, please. The Excel file attached contains the Balance Sheet...

Please- only typewritten answers, no handwritten answers, please.

The Excel file attached contains the Balance Sheet and Income Statement for ABC Corp. ABC Corp is currently planning for next year's sales and asked their financial analysts to prepare a financial plan for the next year so the company can begin to address any outside investment requirements.

  1. Calculate the internal growth rate and sustainable growth rate for ABC Corp. What do these numbers mean?
Income Statement
Sales $80,518,460
COGS -$58,672,892
Other expenses -$10,210,200
Depreciation -$3,608,440
EBIT $8,026,928
Interest -$1,261,040
Taxable income $6,765,888
Taxes (40%) -$2,706,355
Net income $4,059,533
Dividends $1,220,000
Add to RE $2,839,533
Balance Sheet
Assets Liabilities and Equity
Current assets Current liabilities
   Cash $912,870    Accounts payable $1,858,010
Accounts rec. $1,466,250 Notes payable $4,242,700
Inventory $2,146,360    Total CL $6,100,710
   Total CA $4,525,480
Long-term debt $11,000,000
Fixed assets
Net PP&E $35,446,860 Shareholder equity
Common stock $800,000
Retained earnings $22,071,630
   Total equity $22,871,630
Total Assets $39,972,340 Total L&E $39,972,340

Please- only typewritten answers, no handwritten answers, please.

Homework Answers

Answer #1
1) IGR = ROA*b/(1-ROA*b), where
ROA = Return on assets, b = Retention ratio
ROA = 4059533/39972340 = 10.16%
Retention ratio = 2839533/4059533 =
IGR = 0.1016*0.6995/(1-0.1016*0.6995) = 7.65%
2) IGR = ROE*b/(1-ROE*b), where
ROE = Return on equity, b = Retention ratio
ROA = 4059533/22871630 = 17.75%
Retention ratio = 2839533/4059533 = 69.95%
IGR = 0.1775*0.6995/(1-0.1775*0.6995) = 14.18%
3) IGR is internal growth rate. It is the maximum
rate of growth that the firm can attain without
using external funds.
SGR is the external growth rate. It is the
maximum rate of growth that the firm can
achieve with the same debt/equity ratio.
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