Problem 4.4 (slightly revised): The financial statements for R&E Supplies over the period 2014 through 2017 and forecasted for 2018 for R&E Supplies are given below. R&E Supplies, Inc. Net sales Cost of goods sold Gross profit Expenses: General, selling, and administrative (SG&A) expenses Net interest expense Earnings before tax Tax Earnings after tax Dividends paid Additions to retained earnings Supplemental figures: Earnings before interest and taxes Interest rate (%) Tax rate (%) Dividend payout ratio (%) Assets Current assets: Cash and securities Accounts receivable Inventories Prepaid expenses Total current assets Net fixed assets Total assets Liabilities and Owners' Equity Current Liabilities: Bank loan Accounts payable Current portion long-term debt Accrued wages Total current liabilities Long-term debt Common stock Retained earnings Total liabilities and owners' equity *Estimate Interest-bearing debt Owners' equity Invested capital Principal payment 2014 $11,190 $9,400 $1,790 $1,019 $100 $671 $302 $369 $185 $185 $771 45.0% 50.0% Balance Sheets $671 $1,343 $1,119 $14 $3,147 $128 $3,275 $50 $1,007 $60 $5 $1,122 $960 $150 $1,043 $3,275 Supplemental figures: $1,070 $1,193 $2,263 NA Income Statements 2015 $13.764 $11,699 $2,065 $1,239 $103 $723 $325 $398 $199 $199 $826 45.0% 50.0% $551 $1,789 $1,376 $12 $3,728 $124 $3,852 $50 $1,443 $50 $7 $1,550 $910 $150 $1,242 $3,852 $1,010 $1,392 $2,402 -$60 2016 $16,104 $13,688 $2,416 $1,610 $110 $696 $313 $383 $192 $192 $806 45.0% 50.0% $644 $2,094 $1,932 $15 $4,685 $295 $4,980 $50 $2,426 $50 $10 $2,536 $860 $150 $1,434 $4,980 $960 $1,584 $2,544 -$50 2017 $20,613 $17,727 $2,886 $2,267 $90 $529 $238 $291 $146 $146 $619 45.0% 50.0% $412 $2,886 $2,267 $18 $5,583 $287 $5,870 $50 $3,212 $100 $18 $3,380 $760 $150 $1,580 $5,870 $910 $1,730 $2,640 -$50 2018F 25766 22159 $3,607 $3,092 $220 $295 $128 $167 $83 $83 $515 10.0% 45.0% 50.0% $7,472 $280 $7,752 $3,736 $2,203 $150 $1,663 $7,752 $2,203 $1,813 $4,016 INSTRUCTIONS: a. In the space provided, calculate R&E's sustainable growth rate in each year from 2015 through 2018 and the "levers of growth". 2014 2015 2016 2017 2018 Ratio (formatting) Sustainable growth rate Profit margin, P (%) Retention ratio, R (x) Asset turnover, A (8) Financial leverage, T-hat (x) Sustainable growth rate Actual growth in Sales b. Comparing the company's sustainable growth rate with its actual and projected (for 2018) growth rates in sales over these years, what growth management problems does R&E appear to face over this period? c. How did the company cope with these problems? Do you see any difficulties with the way it addressed its growth problems over this period? If so, what are they? d. What advice would you offer management regarding managing future growth?