Question: Using the definitions below, show that EFN can be written as EFN = PM(S)b + [A PM(S )b] g Asset needs will

Using the definitions below, show that EFN can be written as

EFN = – PM(S)b + [A – PM(S )b] × g

Asset needs will equal A × g. The addition to retained earnings will equal PM(S)b × (1 + g).

S = Previous year’s sales

A = Total assets

D = Total debt

E = Total equity

g = Projected growth in sales

PM = Profit margin

b = Retention (plowback) ratio

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