We walked through the two cases (slide 2 versus slide 3) and demonstrated that at the same 20% growth (and the same assumption that Debt-Equity Ratios stay constant year to year) into the next year for both cases, slide 2 does not need EFN (rather, slide 2 could afford to pay out some dividend in the next year), but slide 3 does need EFN.

Please explain what fundamentally gives rise to the difference? Try to relate your explanation to the Sustainable Growth Rate (as well as the SGR formula given in the textbook), ROE and other concepts if needed. Show algebra if it helps.

Financial Forecast FINCS COMPUTERFIELD CORPORATION Financial Statements Income Statement 2017 Projected 2018 2017 End Sales $1,000 Assets $500 Costs 800 Taxable income 200 Taxes (20%) 40 Net income $160 Total Balance Sheet 2018 End projected Debt Equity Total 2017 End $250 2018 End projected $500 5500 Sales grow by 20% Every item increases by 20% Do the numbers add up? How to reconcile? Lecture: Ratio Analysis & Financial Forecast Slide 2 Financial Forecast FNC10 COMPUTERFIELD CORPORATION Financial Statements Income Statement Projected 2018 Balance Sheet 2018 End projected 2017 End Assets $3,000 2017 End $1.200 2018 End projected Sales Costs Taxable income Taxes (20%) Net income 2017 $1,000 800 200 40 $160 Equity $1.809 Total $3.000 Total $3.000 Forecast 2018 financial statements Growth vs External financing Fixed Debt-Equity Ratio vs Internal Growth Rate Dividend Payout Ratio Lecture: Ratio Analysis & Financial Forecast Slide 3 Financial Forecast FINCS COMPUTERFIELD CORPORATION Financial Statements Income Statement 2017 Projected 2018 2017 End Sales $1,000 Assets $500 Costs 800 Taxable income 200 Taxes (20%) 40 Net income $160 Total Balance Sheet 2018 End projected Debt Equity Total 2017 End $250 2018 End projected $500 5500 Sales grow by 20% Every item increases by 20% Do the numbers add up? How to reconcile? Lecture: Ratio Analysis & Financial Forecast Slide 2 Financial Forecast FNC10 COMPUTERFIELD CORPORATION Financial Statements Income Statement Projected 2018 Balance Sheet 2018 End projected 2017 End Assets $3,000 2017 End $1.200 2018 End projected Sales Costs Taxable income Taxes (20%) Net income 2017 $1,000 800 200 40 $160 Equity $1.809 Total $3.000 Total $3.000 Forecast 2018 financial statements Growth vs External financing Fixed Debt-Equity Ratio vs Internal Growth Rate Dividend Payout Ratio Lecture: Ratio Analysis & Financial Forecast Slide 3