Suppose Hoffman grows at exactly the sustainable growth rate of 21.34 percent. What will the pro forma statements look like?

At a 21.34 percent growth rate, sales will rise from $500 to $606.7. The pro forma income statement will look like this:

We construct the balance sheet as we did before. Notice, in this case, that owners’ equity will rise from $250 to $303.3 because the addition to retained earnings is $53.3.

As illustrated, EFN is $53.3. If Hoffman borrows this amount, total debt will rise to $303.3, and the debt-equity ratio will be exactly 1.0, which verifies our earlier calculation. At any other growth rate, something would have to change.

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HOFFMAN COMPANY Pro Forma Income Statement Sales (projected) Costs (83.3% of sales) Taxable income Taxes (21%) Net income Dividends Addition to retained earnings $26.7 53.3 $606.7 505.4 $ 101.3 21.3 $ 80.0