Suppose Hoffman grows at exactly the sustainable growth rate of 21.36 percent. What will the pro forma statements look like?

Question

Accepted Answer

At a 21.36 percent growth rate, sales will rise from $500 to $606.8. The pro forma income statement will look like this:

HOFFMAN COMPANY Pro Forma Income Statement
Sales (projected)		$ 606.8
Costs (80% of sales)		[latex]\underline{485.4}[/latex]
Taxable income		$ 121.4
Taxes (34%)		[latex]\underline{41.3}[/latex]
Net income		[latex]\underline{\underline{\$ 80.1}}[/latex]
Dividends	$26.7
Addition to retained earnings	53.4

We construct the balance sheet just as we did before. Notice, in this case, that owners’ equity will rise from $250 to $303.4 because the addition to retained earnings is $53.4.

HOFFMAN COMPANY Pro Forma Balance Sheet
	$	Percentage of Sales		$	Percentage of Sales
	Assets			Liabilities and Owners’ Equity
Current assets	$242.7	40 %	Total debt	$250.0	[latex]\underline{n/a}[/latex]
Net fixed assets	[latex]\underline{364.1}[/latex]	[latex]\underline{60}[/latex]	Owners’ equity	[latex]\underline{303.4}[/latex]	[latex]\underline{n/a}[/latex]
Total assets	[latex]\underline{\underline{\$ 606.8}}[/latex]	[latex]\underline{\underline{100\%}}[/latex]	Total liabilities and owners’ equity	[latex]\underline{\$ 553.4}[/latex]	[latex]\underline{n/a}[/latex]
			External financing needed	[latex]\underline{\underline{\$ 53.4}}[/latex]	[latex]\underline{\underline{n/a}}[/latex]

As illustrated, EFN is $53.4. If Hoffman borrows this amount, then total debt will rise to $303.4, 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.

Question 4.2: Suppose Hoffman grows at exactly the sustainable growth rate...

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