EXTENDED PRO FORMA STATEMENT

Carrine Kezia Aulia | 102183022Min Vatcharavee P. I 102183026

OUTLINE

EXTENDED PRO FORMA STATEMENTThe percentage of sales

Income Statement Balance Sheet

External Financing and Growth

The Percentage of SalesINCOME STATEMENT

A financial planning method in which accounts are varied depending on a firm’s predicted sales level.

PRO FORMA INCOME STATEMENT

REVIEW

The Percentage of SalesINCOME STATEMENT

25% growth

The Percentage of SalesINCOME STATEMENT

DIVIDENDS$44 + ($44 x 25%) = $55

Find the percentage! (Dividend payout ratio)

44 1 132 31/3 X NET INCOME (pro

forma)1/3 X

$165= $55

CASH DIVIDEND

NET INCOME

The Percentage of SalesINCOME STATEMENT

RETAINED EARNINGS$88 + ($88 x 25%) = $110

Find the percentage! (Add to retained earnings ratio)

88 2 132 32/3 X NET INCOME (pro

forma)2/3 X

$165= $110

Retained Earnings

NET INCOME

The Percentage of SalesBALANCE SHEET

We assume that one items vary directly with sales and others do not. For items that vary with sales, we express each as a percentage of sales for the year just completed. When an item does not vary directly with sales, we write “n/a” for “not applicable.”

The Percentage of SalesBALANCE SHEET

$SALES from original income statement

THE RATIO of TOTAL ASSETS / CAPITAL INTENSITY RATIO

the amount of assets needed to generate $1 in sales

Every increase $1 in sales, inventory will rise by $.60

$ + (increasing sales x percentage of

sales)Projected $ -

Original

$ + (increasing sales x percentage of sales)

Projected $ - Original

Three possible source to put EXTERNAL FINANCINGShort-term borrowingLong-term borrowingNew equity

Net Working Capital (NWC) = 1,200-800 = 400

Net Working Capital (NWC) = Same

300 – 75 = 225

565 – 225 = 340

EXTERNAL FINANCING and

GROWTH

Debt-Equity RatioDEBT-EQUITY

RATIO TOTAL DEBT TOTAL EQUITY

1

GROWTH RATE = 20%

DEBT-EQUITY RATIO

TOTAL DEBT 297.2 TOTAL EQUITY 302.8

0.98

ORIGINAL

0 % Growth

0% growth

0% growth

0

206 294 0.70

25 % Growth

25% Growth

0

320 305 1.05

FINANCIAL POLICY AND GROWTH

THE INTERNAL GROWTH RATETHE SUSTAINABLE GROWTH RATE

Internal Growth Rate

ROA = Return on Assets b = Retention ratio =1 - dividend payout ratio and Return on

Equity = Net Income/Total Shareholder's Equity

Internal growth rate is a formula for calculating the maximum growth rate a firm can achieve without

external financing of any kind.

For example

For the Hoffman Company, net income was $66 and total assets were $500. $44 was retained

Thus ,ROA is $66/500 = 13.2 percent. Of the $66 net income,, so the retention ratio, b, is $44/66 = 2/3. With these numbers, we can calculate the internal growth rate as:

Thus, the Hoffman Company can expand at a maximum rate of 9.65 percent per year without external financing.

IGR = ROA x b 1-ROA x b = .132 x (2/3) 1-.132 x (2/3) = 9.65 percent

Sustainable Growth Rate

ROE = Return on Equity b = Retention ratio =1 - dividend payout ratio and Return on

Equity = Net Income/Total Shareholder's Equity

Sustainable growth rate in a business is the maximum growth rate a business can achieve without having to increase its financial leverage or debt financing.

Sustainable growth rate (SGR) = ROE X b 1-ROE x b

For example

For the Hoffman Company, net income was $66 and total equity were $250. $44 was retained

Thus ,ROE is $66/250 = 26.4 percent. $66 was net income,, so the retention ratio, b,is still $44/66 = 2/3. With these numbers, we can calculate the sustain growth rate as:

SGR = ROE X b 1-ROE x b = .246 x (2/3 ) = 21.36 Percent 1-.264 x (2/3 ) Thus, the Hoffman Company can expand at a maximum

rate of 21.36 percent per year without external equity financing

Determinants of Growth

ROE SGR

ROE Retention ratio 4 Factors1.Profit margin2.Dividend policy3.Financial policy4.Total asset turnover

If a firm does not wish to sell new equity and its profit margin, dividend policy, financial policy, and total asset turnover (or capital intensity) are all fixed, then there is only one possible growth rate

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