Q. No.

Ex-1
2
3
Prob-1
2
3
4
5
6
7
8
9
 Topic Covered
Statement of sources and uses of funds, cash flow statement
Cash budget, determination of additional borrowing and performa balance sheet
Sustainable growth rate ratios
Clasification of BS & P&L items as sources or uses of funds
Statement of sources and uses of funds, cash flow statement and statement of working capital
Statement of sources and uses of funds and statement of working capital
Prepration of cash budget
Prepration of BS and IS using various ratios
Prepration of cash budget
Prepration of promorma income statement using cash budget
Sustainable growth rate ratios
Computation of various components of sustainable growth rate by altering standard formula
Q1-
Serap Jones, had the following financial statements for 20X1 and 20X2:

a- Prepare a source and use of funds on cash basis

b- Prepare an accounting statement of cash flows
c- Evaluate your finds

20X1 20X2
Assets
Cash and Equivalents 140,000 31,000
Accounts Receivable 346,000 528,000
Inventories 432,000 683,000
Current Assets 918,000 1,242,000
Net Fixed Assets 1,113,000 1,398,000
Total Assets 2,031,000 2,640,000

Liabilities and Equities

 Accounts payables 413,000 627,000
Accruals 226,000 314,000
Bank Borrowings 100,000 235,000
Current Liabilities 739,000 1,176,000
Common Stock 100,000 100,000
Retained Earnings 1,192,000 1,364,000
Total 2,031,000 2,640,000
Note: Depreciation was 189,000 for 20X2 and no dividends were paid.

Ans1a-
Serap Jones
Statement of Sources and uses of funds
Sources of Funds Uses of Funds

Funds provided by operation

Net Profit 172,000 Addition in fixed assets (W-1)

Depreciation 189,000
361,000
Increase in Accounts Payable 214,000 Addition in Inventories
Increase in Bank Borrowings 135,000 Addition in Receivables
Increase in Accruals 88,000
Decrease in Cash 109,000

907,000

(W-1)
Addition in Fixed assets 285,000
Depreciation 189,000

474,000

Ans1b-
Serap Jones
Accounting Statement of Cash Flows

Cash Flows from Operating Activities

Net profit 172,000
Adjustments to reconcile earnings to net cash provided
by operating activities
Add:
Depreciation 189,000
Changes in Current Assets and Current Liabilities
Increase in Accounts receivable - 182,000
Increase in Inventories - 251,000
Increase in Accounts Payable 214,000
Increase in Accruals 88,000

Net Cash Flows from Operating Activities (a) 230,000

Cash Flows from Investing Activities (b)

Increase in fixed assets - 474,000

Cash Flows from Financing Activities ( C )

Increase in short-term borrowing 135,000
Net Cash flows from operating, investing and financing activities - 109,000
Add: cash and cash equivalents at the beginning of the year 140,000
Cash and Cash equivalent at the end of the year 31,000
Ans1c-
The company has had substantial capital expenditure and increase in
accounts receivables and inventories. To finance this growth, which is
greatly in excess of the growth in equity base, the company has leaned
on the trade, has increased its accruals, and has increased its bank
borrowings significantly. This has not been enough; there was a draw
down in the cash position. The financing is short-term in nature but, it
is being used mostly for long-term build up in assets.
474,000
251,000
182,000

907,000
Q2-
Consider the balance sheet of Rodriguez Malting Company at December 31 (in
thousands). The company has received a large order and anticipate the need to
go its bank to increase its borrowings. As a result, it has to forecast its cash
requirements for January, February, and March. Typically, the company collects
20 percent of its sales, in the month of sales, 70 percent in the subsequent month,
and 10 percent in the second month after the sale. Al sales are credit sales.

Cash 50 Accounts Payable

Accounts Receivable 530 Bank Loans
Inventories 545 Accruals
Current Assets 1,125 Current Liabilities
Net Fixed Assets 1,836 Long-term debt
Common Stock
Retained Earnings

Total Assets 2,961 Total Liabilities and Equity

Purchase of raw materials to produce malt are made in the month prior to the sale an amount
to 60 percent of sales in the subsequent month. Payments for these purchases occur in the
month after the purchase. Labour costs, including overtime, are expected to be $150,000 in
January, $200,000 in February, and $160,000 in March. Selling, administrative, taxes and other
cash expenses are expected to be $100,000 per month for January through March. Actual Sales
in November and December and projected sales for January through April are as follows (in thousands).

November 500 January 600

December 600 February 1,000

On the basis of this information:

a- prepare a cash budget for the months of January, February, and March.
b- Determine the amount of additional bank borrowings necessary to maintain a cash
balance of$50,000 all times
c- Prepare a proforma balance sheet for March, 31.

Ans2a-
Rodriguez Malting Company
Cash Budget
Nov Dec Jan Feb
Sales 500 600 600 1,000
 Cash Receipts
20% in the month of sale 120 200
70% in the subsequent month 420 420
10% in the second month 50 60

Total Cash Receipts 590 680

Cash disbursements
Purchases 360 600 390
Payments for purchases 360 600
Labor costs 150 200
Sell, admin, & taxes 100 100

Total Cash disbursements 610 900

Receipts less disbursements - 20 - 220

Ans2b- Month Add. Borrow Cumm. Borrow.

Jan 20 420
Feb 220 640
Mar - 240 400

The amount of financing peaks in February owing to the need to pay for purchases made
the previous month and higher labour costs. In March, substantial collections are made
on the prior month's billings, causing a large net cash inflows sufficient payoff additional
borrowings.

Ans2c-
Proforma Balance Sheet
March 31

Cash 50 Accounts Payable (Pur. Mar)

Accounts Receivable (W-1) 620 Bank Loans
Inventories (W-3) 635 Accruals
Current Assets 1,305 Current Liabilities
Net Fixed Assets 1,836 Long-term debt
Common Stock
Retained Earnings (W-2)

Total Assets 3,141 Total Liabilities and Equity

Workings
(W-1) Accounts Receivable
 March (650 X 0.8) 520
February (1000 X 0.1) 100

620

(W-2) Retained Earnings prior year balance 1,439

Sales 2,250
Less: payment for Purchases - 1,350
Less: Labour costs - 510
All Other Expenses - 300
1,529

(W-3) Opening Balance 545

Purchases (Total Pur - Total Payment , Jan - Mar) 90
Closing Balance Inventories 635
uent month,

360
400
212
972
450
100
1,439

s and Equity 2,961

or to the sale an amount

urchases occur in the
ted to be $150,000 in
strative, taxes and other
ough March. Actual Sales
April are as follows (in thousands).

March 650
April 750

maintain a cash

Mar Apr
650 750
 130
700
60

890

450 1,440
390 1,350
160 90
100

650

240

Cumm. Borrow.

or purchases made
ections are made
t payoff additional

ble (Pur. Mar) 450

400
212
1,062
450
100
1,529

s and Equity 3,141

Q3-
Zippo Industry has equity capital of$12 million, total debt of $8 million, and sales
last year of $30 million.

a- It has target assets-to-sales ratio of .6667, a target profit margin of .04, a debt-
-to-equity ratio of .6667, and a target earnings retention rate of .75. In steady state,
what is its sustainable growth rate?

b- Suppose now. For next year, the company has a target assets-to-sales ratio of .62,
a target net profit of .05, and a target debt-to-equity ratio of .80. It wishes to pay an
annual dividend of $3 million and rise $1 million in equity capital next year.
What is the sustainable growth rate for next year? Why does it differ from that in part a ?

Ans3a-
Sustainable Growth Rate = b X (NP/S) X (1+ D/E)
(A/S) -(b X (NP/S) X (1+ D/E)

Where,
= 0.75 X (0.04) X (1 +0.6667)
b = Retention Ration = 0.6667-(0.75 X (0.04) X (1 +0.6667)
NP/S = Net Profit divided by Sales
D/E = is the ratio of debt and equity = 0.050001
A/S = is the ratio of Assets to Sales 0.616699

8.11%

Sustainable Growth Rate = (E0 +E1 - DIV) X (1+D/E)X (S/A) X (1/S) -1

1- (NP/S) X (1+D/E)X (S/A)

Where, = (12 + 1 -0. 3) X(1+0.8) X (1/.62) X 1/30

E0 = Old Equity = (1- (0.05) X (1+0.8) X (1/.62)
E1 = New Equity
Div = Dividend
NP/S = Net Profit divided by Sales = 36.87097 X 0.0333 -1
D/E = is the ratio of debt and equity 0.854839
S/A = is the ratio of Sales to Asset
= 43.13208 X 0.03333 -1

1.437592 -1

43.76%
The company has moved from steady state with higher target operating
efficiency, a higher debt ratio, the sale of common stock. All of these things
permit a high rate of growth in sales next year. Unless further changes in
these directions occur, the SGR will decline in future years.
-1
Prob1-
Galow Fish canning Company reports the following changes from the preceding
year end. Categorize each change as a source of fund or a use of fund.

Item Change
Cash -100
Accounts Receivable 700
Inventory -300
Gross fixed assets 900
Depreciation 1000
Accounts Payable 300
Accruals -100
Long-term debt -200
Net Profits 600
Dividends 400

Ans1-

Item Change Classification

Cash -100 The residual
Accounts Receivable 700 Use
Inventory -300 Source
Gross fixed assets 900
Depreciation -1000
Net Fixed Asset -100 Source
Accounts Payable 300 Source
Accruals -100 Use
Long-term debt -200 Use
Net Profits 600 Source
Dividends 400 Use
Prob2-
Kohn Corporation comparative balance sheet December, 31 ( in millions):

Assets 20X1 20X2 Liabilities and Equity

2 Cash 5 3 Notes Payable

Accounts Receivable 15 22 Accounts Payable
Inventories 12 15 Accrued Wages
Fixed Assets, net 50 55 Accrued Taxes
Other assets 8 5 Long-term debt
Common Stock
Retained Earnings

Total assets 90 100 Total Liabilities and equity

Kohn Corporation Income statement and Retained Earnings year ended December, 31 20X2
Net Sales
Expenses
Cost of Goods Sold 25,000,000
Selling, general, and administrative 5,000,000
Depreciation 5,000,000
Interest 2,000,000
Net income before taxes
Less: Taxes
Net income
Add: Retained earnings at 12/31/X1
Subtotal
Less: Dividends
Retained Earnings at 12/31/X2

a- Prepare a source and use of funds on cash basis for 20X2 for the Kohn Corporation.
b- Prepare an accounting statement of cash flows.
c- Prepare a source and use of working capital statement for 20X2.
Ans2a-
Kohn Corporation
Statement of Sources and uses of funds
Sources of Funds Uses of Funds

Funds provided by operation

Net Profit 7 Addition in fixed assets

Depreciation 5
12

Increase in Accounts Payable 3 Addition in Inventories

Increase in accrued taxes 2 Addition in Receivables
Decrease in other assets 3 Decrease in Notes Payable
Increase in long-term debt 15 Issuance of dividends
Increase in common Stock 6
Decrease in cash 2
43
 (W-1)
Addition in Fixed assets 5
Depreciation 5

10

Ans2a-
Kohn Corporation
Statement of Cash Flows
Net profit 7
Adjustments to reconcile earnings to net cash provided
Depreciation 5
Changes in Current Assets and Current Liabilities
Increase in Accounts Payable 3
Increase in accrued taxes 2
Increase in Inventories -3
Increase in Receivables -7

Net Cash Flows from Operating Activities (a) 7

Cash Flows from Investing Activities
Investments in fixed assets -10
Increase in other assets 3

Cash Flows from Investing Activities (b) -7

Cash Flows from Financing Activities

Increase in long-term debt 15

Increase in common Stock 6
Issuance of dividends -3
Decrease in Notes Payable -20

Cash Flows from Financing Activities ( C ) -2

Net Cash Flow (a +b+c) -2

Add: cash and cash equiv. at the beginning of the year 5
Cash and Cash equivalent at the end of the year 3
Ans2a-
Kohn Corporation
Statement of Sources and uses of Working Capital
Sources of Funds Uses of Funds
Funds provided by operation
Net Profit 7 Dividends
Depreciation 5
Decrease in other assets 3 Addition to plant
Increase in long-term debt 15 Increase in Working Capital
Increase in common Stock 6
36
 20X1 20X2

20 0
5 8
2 2
3 5
0 15
20 26
40 44

90 100

ended December, 31 20X2

 48,000,000

37,000,000
11,000,000
4,000,000
7,000,000
40,000,000
47,000,000
3,000,000
44,000,000

he Kohn Corporation.
(W-1) 10

3
7
20
3

43
3

10
23

36
Prob3-
Financial Statements for Sennet Corporation follow:

20X1 20X2 20X1 20X2

Cash 4 5 Accounts Pa 8 10
Accounts Receivable 7 10 Notes Payab 5 5
Inventories 12 15 Accrued Wa 2 3
Current assets 23 30 Accrued Tax 3 2
Net Plant 40 40 Current 18 20
Long-term d 20 20
Common Sto 10 10
Retained Ear 15 20
Total assets 63 70 Total Liabili 63 70

Net Sales 95
Cost of Goods Sold 50
Selling,general,andadministrative expenses 15
Depreciation 3
Interest 2 70
Net income before taxes 25
Taxes 10
Net income 15

a- Prepare a source and use of funds for Sennet.

b- Prepare a source and use of working capital.

Ans3a-
Sennet Corporation
Statement of Sources and uses of funds
Sources of Funds Uses of Funds

Funds provided by operation

Net Profit 15 Addition in Invent 3

Depreciation 3 Addition in Recei 3
18 Decrease in Accru 1
Addition in Fixed 3
Increase in Accounts Payable 2 Dividends (balanci 10
Increase in wages 1 Increase in Cash 1

21 21
 (W-1)
Addition in Fixed assets -
Depreciation 3

3
Ans3b-
Sennet Corporation
Statement of Sources and uses of Working Capital
Sources of Funds Uses of Funds
Funds provided by operation

Net Profit 15 Dividends 10

Depreciation 3
Addition to plant 3
Increase in Workin 5

18 18

20X1 20X2
Current assets 23 30
Current liabilities 18 20
Working Capital 5 10
Increase in Working Capital 5
Prob4-
Prepare the cash budget for ACE Manufacturing Company indicating receipts,
disbursements for May, June, and July. The firm wishes to maintain a cash
balance of $20,000 at all times. Determine whether or not borrowing will be
necessary during the period, and if it is when and for how much. As of April 30,
the firm had a balance of $20,000 in cash.

Actual Sales Forecasted Sales

January 50,000 May 70,000
February 50,000 June 80,000
March 60,000 July 100,000
April 60,000 August 100,000

Accounts Receivable: 50 percent of the total sales are for cash. The remaining
50 percent will be collected equally during the following 2 months (the firm incurs
a negligible bad debt loss)
Cost of goods manufactured: 70 percent of sales, 90 percent of this cost is paid during
the first month after incurrence, the remaining 10 percent is paid in the following month.
Sales and administrative expenses: $10,000 per month plus 10 percent of sales. All
expenses are paid in the month of incurrence.
Interest payments: Semiannual interest of $18,000 is paid during July. An annual $50,000
in sinking-fund payment is also made at that time.
Dividends: A $10,000 dividend payment will be declared and made in July.
Capital Expenditure: $40,000 will be invested in plant and equipment in June.
Taxes: Income tax payment of $1,000 will be made in July.

Ans4-

ACE Manufacturing Company

Cash Budget
Jan Feb Mar Apr May Jun
Sales 50,000 50,000 60,000 60,000 70,000 80,000

Cash Receipts
Cash Sales 30,000 30,000 35,000 40,000
Credit Sales 50% Apr in May and Jun 15,000 15,000 15,000
50% May in June & July 15,000 17,500
50% Jun in July & Aug
Total Cash Receipts 65,000 72,500

Cash Payments
Cost of Good Manufactured 42,000 42,000 49,000 56,000

90% Payment of goods manufactured 37,800 37,800 44,100

10% Payment of goods manufactured 4,200 4,200
Sales and Administrative expenses 17,000 18,000
Interest Payments
Sinking fund payments
Dividends
Capital Expenditure 40,000
Taxes
Total Cash Payments 59,000 106,300

Net Cash Flows 6,000 - 33,800

Beg. Cash Balance 20000 26,000

End. Cash Balance 26,000 - 7,800

without financing

Cumulative Borrowings - 27,800

End. Cash Bal. after borrow. 20,000
paid during
owing month.

nnual $50,000

Jul Aug
100,000 100,000

50,000 50,000

17,500
20,000 20,000
87,500
 70,000 70,000

50,400 63,000
4,900 5,600
20,000
18,000
50,000
10,000

1,000
154,300

- 66,800

- 7,800

- 74,600

94,600
20,000
Prob5-
Downeast Nautial Company expects sales of $2.4 million next year and expects
sales of the same amount the following year. Sales are spread evenly throughout
the year. On the basis of the following information, prepare a proforma balance
sheet and income statement for year end:

Cash = minimum of 4 percent of annual sales

Accounts Receivable = 60-day average collection period based on annual sales
Inventories = turnover of 8 times a year
Net fixed assets = $500,000 now; capital expenditure are equal to depreciation.
Accounts payable = 1 month's purchase
Accruals = 3 percent of sales
Bank borrowing = $50,000 now; can borrow up to $250,000
Long-term debt = $300,000; $75,000 are payable at year end
Common Stock = $100,000; no additions planned
Retained Earnings = $500,000 now
Net profit margin = 8 percent of sales
 Dividends = none
Cost of goods sold = 60 percent of sales
Purchases = 50 percent of cost of goods sold
Income Taxes = 50 percent of before-tax profit

Ans5-
Downeast Nautical Company
Income Statement
Sales 2,400,000
Cost of Goods Sold (60% of 2.4M) 1,440,000
Gross Profit 960,000
Depreciation (Balancing Figure) 576,000
Profit before taxes 384,000
Taxes (50% of before tax) 192,000
Net Profit (8% of Sales) 192,000
Dividend -
Retained Profit for the year 192,000
Retained Earnings beginning balance 500,000
Retained profit at year end 692,000
Downeast Nautical Company
Balance Sheet
Assets
Cash 96,000
Accounts receivable (W-1) 400,000
Inventory (W-2) 180,000
Current Assets 676,000
Net Fixed Assets 500,000

Total Assets 1,176,000

Liabilities and Equity

Accounts Payable (W-3) 60,000
Accruals (8% of Sales) 72,000
Bank Borrowings (Bal. Fig) 27,000
Current Liabilities 159,000
Long-Term debt (300-75) 225,000
Common Stock 100,000
Retained Earnings 692,000 1,176,000

Total Liabilities and Equity 1,176,000 -

Workings W-1
1- Sales 2,400,000

2- Days in year 360

3- Turnover in days 60
4- Accounts Receivable Turnover 6

5= 1/4 Accounts Receivable 400,000

W-2
Cost of Goods Sold 1,440,000
Inventory Turnover Ratio 8

Inventory 180,000
W-3
Cost of Goods Sold 1,440,000
Purchases 50% of COGS 720,000
Accounts Payable (720,000/12) 60,000
based on annual sales

e are equal to depreciation.

Prob6-
Given the Information that follows, for Central City Department Store
for the first 6 months of 20X2 under the following assumptions:

a- All prices and costs remain constant.

b- Sales are 75 percent for credit and 25 percent for cash.
c- In terms of credit sales, 60 percent are collected in the month after the
sales, 30 percent in the second month and 10 percent in the third. Bad debt
loses are insignificant.
d- Sales, actual and estimated:

October 20X1 300,000 March 20X2

November 20X1 350,000 April 20X2
December 20X1 400,000 May 20X2
January 20X1 150,000 June 20X2
February 20X1 200,000 July 20X2

e- payments for purchases and merchandise are 80 percent of the following month's
anticipated sales.
d- Wages and salaries are:

January 30000 March 50000

February 40000 April 50000

f- Rent is $2,000 a month.

g- Interest of $7,500 is due at the end of each calendar quarter.
h-A tax prepayment on 20X2 income of $50,000 is due in April.
i- A capital investment of $30,000 is planned in June.
j- The company has a cash balance of $100,000 at December, 31 20X1.
which is the minimum desired level for cash. Funds can be borrowed in
multiples of $5,000 on a monthly basis. (Ignore tax on such borrowings.)

Ans6- Central City Department Store

Cash Budget
Oct Nov Dec Jan
Sales 300,000 350,000 400,000 150,000

Credit Sales 75% 225,000 262,500 300,000 112,500

Cash Receipts
 Cash Sales 25% 75,000 87,500 100,000 37,500
60% 135,000 157,500 180,000
30% 67,500 78,750
10% 22,500

Total Cash Receipts 75,000 222,500 325,000 318,750

Cash Payments
Purchases 280,000 320,000 120,000 160,000
Wages and salaries 30,000
Rent 2,000
Interest -
Tax Prepayment -
Capital Expenditure -

Total Cash Payments 192,000

Net Cash Flow 126,750

Cash Opening Balance 100,000

Cash Closing Balance without financing 226,750
Cumulative borrowing
Cash Closing Balance after financing 226,750

Fawrwa No. 34663261

 200,000
300,000
250,000
200,000
300,000

ollowing month's

May 40000
June 35000

Feb Mar Apr May June July

200,000 200,000 300,000 250,000 200,000 300,000

150,000 150,000 225,000 187,500 150,000 225,000

 50,000 50,000 75,000 62,500 50,000 75,000
67,500 90,000 90,000 135,000 112,500 90,000
90,000 33,750 45,000 45,000 67,500 56,250
26,250 30,000 11,250 15,000 15,000 22,500

233,750 203,750 221,250 257,500 245,000 243,750

160,000 240,000 200,000 160,000 240,000 -

40,000 50,000 50,000 40,000 35,000
2,000 2,000 2,000 2,000 2,000
- 7,500 - - 7,500
- - 50,000 - -
- - - - 30,000

202,000 299,500 302,000 202,000 314,500

31,750 - 95,750 - 80,750 55,500 - 69,500

226,750 258,500 162,750 82,000 137,500

258,500 162,750 82,000 137,500 68,000
20,000 35,000
258,500 162,750 102,000 137,500 103,000
Prob7-
Use the cash budget worked out in problem 6 and with the following
additional information prepare a proforma income statement for the
first half of 20X2 for the Central City Department Store.

a- Inventory at December, 31 20X1 was $200,000.

b- Depreciation is taken on straight line basis on $250,000 of assets with
an average remaining life of 10 years and no salvage value. It is recorded
as an operating expense apart from cost of goods sold.
c- tax rate is 40 percent.

Ans7-

Sales (Jan to June) 1,300,000

Cost of Goods Sold (Dec to May) 1,040,000
Gross Profit 260,000
Operating Expenses
Wages and salaries 245,000
Rent 12,000
Interest 15,000
Depreciation 12,500
284,500

Operating Loss - 24,500

Taxes 40% 9,800
After Tax loss - 14,700
Prob8-
Liz Clarison Industries has $40 million in shareholders' equity and sales of
$150 million last year.

a- its target ratios are asset-to-sales ratio, .40 net profit margin, .07; debt-to-
equity ratio, .50; and earnings retention , .60. if these ratios respond to steady
state, what is its sustainable growth rate?

b- If instead of these ratios, what would be sustainable growth rate next year if
the company moved from steady state and had the following targets? Asset-to-sales
ratio, .42, net profit margin, .06, debt-to-equity ratio, .45, dividend of $5 million;
and no new equity financing.

Ans8a-
Sustainable Growth R= b X (NP/S) X (1+ D/E)
(A/S) -(b X (NP/S) X (1+ D/E)

Where,
= 0.6 X (0.07) X (1 +0.5)
b = Retention Ration = 0.4-(0.6 X (0.07) X (1 +0.5)
NP/S = Net Profit divided by Sales
D/E = is the ratio of debt and equity = 0.063
A/S = is the ratio of Assets to Sales 0.337

18.69%

Sustainable Growth R= (E0 +E1 - DIV) X (1+D/E)X (S/A)

X (1/S) -1
1- (NP/S) X (1+D/E)X (S/A)

Where, = (40 + 0 -5) X(1+0.45) X (1/.42) X 1/150 -1

E0 = Old Equity = (1- (0.06) X (1+0.45) X (1/.42)
E1 = New Equity
Div = Dividend
NP/S = Net Profit divided by Sal = 120.8333 X 0.00667 -1 X 0.006667 -1
D/E = is the ratio of debt and equity 0.792857
S/A = is the ratio of Sales to Asset
= 152.4024 X 0.00667 -1

1.016524 -1
 1.65%

Moving to lower relatively profitability and a lower debt ratio, which may be a one
shot occurrence, lowers dramatically the sustainable growth rate. The change is debt
affects the level of overall assets, not just the growth component.
2.380952
Prob9-
Hildbranch Hydronics Corporation wishes to achieve a 35 percent increase in sales
next year. Sales last year were $30 million, and the company has equity capital of
$12 million. It intends it raise a $.5 million in new equity by sale of stock to officers.
No dividend is planned. Tentatively, the company has set the following targets:
assets-to-sales ratio, .67; net profit margin, .08; and debt to equity ratio, .60.
The company has determined that these ratios are not sufficient to produce a growth
in sales of 35 percent.

a- Holding the other two target ratios constant, what asset-to-sales ratio would be necessary?
b- Holding the other two ratios constant, what net profit margin would be necessary ?
c- Holding the other two ratios constant, what debt-to-equity ratio would be necessary?

Ans9a-

Sustainable Growth Rate = b X (NP/S) X (1+ D/E)

(A/S) -(b X (NP/S) X (1+ D/E)

S/A = (1+SGR X S)
1+D/E (E0 +E1 - Div+(NP/S) X (1+SGR) X S

= 1.35 X 30
1.6 X (12+0.5-0)+(0.08X1.35X30)
= 40.5 1.608164
25.184
A/S = 1/A/S
=1/1.60816
= 0.621829
Ans9b-

NP/S = 1 - Eq0 + Eq1 - Div

(1+D/E) X(S/A) 1+SGR X S
= 1 - 5+0.12-0
(1+.6) X1/.67) 1.35X 30
= 1 - 12.5
2.3880597015 40.5
= 0.41875 - 0.308642
= 11.01%

Ans9c-
D/E = (1+SGR) X S -1
E0 + E1 -Div + (NP/S X 1+SGR XS) X (1/A/S)

= 1.35 X 30 -1
((12+.5) +(0.08 X 1.35 X 30 )X (1/.67)

= 40.5 -1
23.49254

= 1.723952 -1

= 0.724
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