The Optical Scam Company has forecast a sales growth rate of 18 percent for next year. The current financial statements are shown below. Current assets, fixed assets, and short-term debt are proportional to sales.

INCOME STATEMENT
Sales...........................................................$ 31,600,000
Costs..............................................................24,650,000
Taxable income...........................................$ 6,950,000
Taxes................................................................2,432,500
Net income...................................................$ 4,517,500
Dividends.......................................................$1,450,000
Addition to retained earnings.......................3,067,500

a. Using the equation from the chapter, calculate the external funds needed for next year.
b. Construct the firm€™s pro forma balance sheet for next year and confirm the external funds needed you calculated in part (a).
c. Calculate the sustainable growth rate for the company.
d. Can the company eliminate the need for external funds by changing its dividend policy? What other options are available to the company to meet its growth objectives?

Transcribed Image Text:

BALANCE SHEET Liabilities and Equity Assets $ 5,150,000 $ 7,700,000 $10,750,000 Current assets Short-term debt Long-term debt Fixed assets 32,100,000 $ 3,100,000 Common stock Accumulated retained earnings 26,900,000 $30,000,000 Total equity Total assets $42,850,000 Total liabilities and equity $42,850,000