Chapter 18, Question 1- The following is the financial statement of Executive Fruit Company for the year ended December 2014. INCOME STATEMENT, 2014 (Figures in $ Thousands)   Revenue $ 3,500   Cost of goods sold 3,150   EBIT $ 350   Interest 70   Earnings before taxes $ 280   State and federal tax 112   Net income $ 168   Dividends 112   Additions to retained earnings $ 56 BALANCE SHEET (Year-End, 2014) (Figures in $ Thousands)   Assets      Net working capital $ 350      Fixed assets 1,400      Total assets $ 1,750   Liabilities and shareholders' equity      Long-term debt $ 700      Shareholders' equity 1,050      Total liabilities and shareholders' equity $ 1,750 The following are the first stage and second stage pro forma financial statements of Executive Fruit Company for the year ended December 2015. First stage pro forma statements: PRO FORMA INCOME STATEMENT, 2015 (Figures in $ Thousands)   Revenue $ 3,850   Cost of goods sold 3,465   EBIT $ 385   Interest 70   Earnings before taxes $ 315   State and federal tax 126   Net income $ 189   Dividends 126   Additions to retained earnings $ 63 PRO FORMA BALANCE SHEET (Year-End, 2015) (Figures in $ Thousands)   Assets      Net working capital $ 385      Fixed assets 1,540      Total assets $ 1,925   Liabilities and shareholders' equity      Long-term debt $ 700      Shareholders' equity 1,113      Total liabilities and shareholders' equity $ 1,813         Required external financing $ 112 Second stage pro forma balance sheet: PRO FORMA BALANCE SHEET (Year-End, 2015) (Figures in $ Thousands)   Assets      Net working capital $ 385      Fixed assets 1,540      Total assets $ 1,925   Liabilities and shareholders' equity      Long-term debt $ 812      Shareholders' equity 1,113      Total liabilities and shareholders' equity $ 1,925 How would Executive Fruit’s financial model change if the dividend payout ratio were cut to 1/3? Use the revised model to generate a new financial plan for 2015 assuming that debt is the balancing item. What would be the required external financing? (Do not round intermediate calculations.) Dividends fall by $ [removed]. Therefore, the requirement for external financing falls from $ [removed]to $ [removed]. On the other hand, shareholders' equity will be increased by $ [removed]. The right-hand side of the balance sheet becomes (Do not round intermediate calculations. Enter your answers in thousands.) :   Long-term debt $ [removed]    Shareholders' equity [removed]    Total $ [removed]  Chapter 18, Question 2- Find the sustainable and internal growth rates for a firm with the following ratios: asset turnover = 1.60; profit margin = 6%; payout ratio = 30%; equity/assets = .50. (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.)   Sustainable growth rate [.

1. Chapter 18, Question 1- The following is the financial statement
of Executive Fruit Company for the year ended December 2014.
INCOME STATEMENT, 2014
(Figures in $ Thousands)
Revenue
$
3,500
Cost of goods sold
3,150
EBIT
$
350
Interest
70
Earnings before taxes
$
280
State and federal tax
112

2. Net income
$
168
Dividends
112
Additions to retained earnings
$
56
BALANCE SHEET (Year-End, 2014)
(Figures in $ Thousands)
Assets
Net working capital
$
350
Fixed assets
1,400

3. Total assets
$
1,750
Liabilities and shareholders' equity
Long-term debt
$
700
Shareholders' equity
1,050
Total liabilities and shareholders' equity
$
1,750
The following are the first stage and second stage pro forma
financial statements of Executive Fruit Company for the year
ended December 2015.
First stage pro forma statements:

4. PRO FORMA INCOME STATEMENT, 2015
(Figures in $ Thousands)
Revenue
$
3,850
Cost of goods sold
3,465
EBIT
$
385
Interest
70
Earnings before taxes
$
315
State and federal tax
126
Net income

5. $
189
Dividends
126
Additions to retained earnings
$
63
PRO FORMA BALANCE SHEET (Year-End, 2015)
(Figures in $ Thousands)
Assets
Net working capital
$
385
Fixed assets
1,540
Total assets
$

6. 1,925
Liabilities and shareholders' equity
Long-term debt
$
700
Shareholders' equity
1,113
Total liabilities and shareholders' equity
$
1,813
Required external financing
$
112
Second stage pro forma balance sheet:

7. PRO FORMA BALANCE SHEET (Year-End, 2015)
(Figures in $ Thousands)
Assets
Net working capital
$
385
Fixed assets
1,540
Total assets
$
1,925
Liabilities and shareholders' equity
Long-term debt
$
812
Shareholders' equity
1,113

8. Total liabilities and shareholders' equity
$
1,925
How would Executive Fruit’s financial model change if the
dividend payout ratio were cut to 1/3? Use the revised model to
generate a new financial plan for 2015 assuming that debt is the
balancing item. What would be the required external financing?
(Do not round intermediate calculations.)
Dividends fall by $ [removed]. Therefore, the requirement for
external financing falls from $ [removed]to $ [removed]. On the
other hand, shareholders' equity will be increased by $
[removed].
The right-hand side of the balance sheet becomes
(Do not round intermediate calculations. Enter your answers in
thousands.)
:

9. Long-term debt
$ [removed]
Shareholders' equity
[removed]
Total
$ [removed]
Chapter 18, Question 2- Find the sustainable and internal
growth rates for a firm with the following ratios: asset turnover
= 1.60; profit margin = 6%; payout ratio = 30%; equity/assets =
.50.
(Do not round intermediate calculations. Enter your answers as
a percent rounded to 2 decimal places.)
Sustainable growth rate
[removed]%
Internal growth rate
[removed]%
Chapter 18, Question 3-
Executive Fruit’s financial manager believes that sales in 2015
could rise by as much as 20% or by as little as 5%. Assets and
costs change in proportion to sales, debt remains constant, and
no new equity financing occurs.

10. a.
Recalculate the first-stage pro forma financial statements under
these two growth assumptions and calculate the required
external financing (All figures are in thousands).
(Enter your answers in thousands.)
Base Case
20% Growth
5% Growth
INCOME STATEMENT
Revenue
$
3,000
$ [removed]
$ [removed]
Cost of goods sold
2,700
[removed]
[removed]

11. EBIT
$
300
$ [removed]
$ [removed]
Interest
60
[removed]
[removed]
Earnings before taxes
$
240
$ [removed]
$ [removed]
State and federal tax
96
[removed]
[removed]

12. Net income
$
144
$ [removed]
$ [removed]
Dividends
96
[removed]
[removed]
Retained earnings
$
48
$ [removed]
$ [removed]
BALANCE SHEET

13. Assets
Net working capital
$
300
$ [removed]
$ [removed]
Fixed assets
1,200
[removed]
[removed]
Total assets
$
1,500
$ [removed]
$ [removed]

14. Liabilities and shareholders' equity
Long-term debt
$
600
$ [removed]
$ [removed]
Shareholders' equity
900
[removed]
[removed]
Total liabilities and shareholders' equity
$
1,500
$ [removed]
$ [removed]

15. Required external financing
$ [removed]
$ [removed]
b.
Assume any required external funds will be raised by issuing
long-term debt and that any surplus funds will be used to retire
such debt. Prepare the completed (second-stage) pro forma
balance sheet.
(Enter your answers in thousands.)
BALANCE SHEET
Base Case
20% Growth
5% Growth
Assets
Net working capital
$
300

16. $ [removed]
$ [removed]
Fixed assets
1,200
[removed]
[removed]
Total assets
$
1,500
$ [removed]
$ [removed]
Liabilities and shareholders' equity
Long-term debt
$
600
$ [removed]

17. $ [removed]
Shareholders' equity
900
[removed]
[removed]
Total liabilities and shareholders' equity
$
1,500
$ [removed]
$ [removed]
Chapter 18, Question 2- Plank’s Plants had net income of
$16,000 on sales of $60,000 last year. The firm paid a dividend
of $1,600. Total assets were $900,000, of which $450,000 was
financed by debt.

18. a.
What is the firm’s sustainable growth rate?
(Do not round intermediate calculations. Enter your answer as a
percent rounded to 1 decimal place.)
Sustainable growth rate
[removed]%
b.
If the firm grows at its sustainable growth rate, how much debt
will be issued next year?
(Do not round intermediate calculations.)
New debt
$ [removed]
c.
What would be the maximum possible growth rate if the firm
did not issue any debt next year?
(Do not round intermediate calculations. Enter your answer as a
percent rounded to 2 decimal places.)
Maximum growth rate
[removed]%

19. Chapter 18, Question 5- An all-equity-financed firm plans to
grow at an annual rate of at least 12%. Its return on equity is
20%. What is the maximum possible dividend payout rate the
firm can maintain without resorting to additional equity issues?
(Do not round intermediate calculations. Enter your answer as a
percent rounded to 1 decimal place.)
Maximum dividend payout ratio
[removed]%
Chapter 18, Question 6- The 2015 financial statements for
Growth Industries are presented below:
INCOME STATEMENT, 2015
Sales
$
280,000
Costs
190,000
EBIT
$
90,000
Interest expense

20. 18,000
Taxable income
$
72,000
Taxes (at 35%)
25,200
Net income
$
46,800
Dividends
$ 23,400
Addition to retained earnings
23,400
BALANCE SHEET, YEAR-END, 2015
Assets

21. Liabilities
Current assets
Current liabilities
Cash
$
4,000
Accounts payable
$
11,000
Accounts receivable
9,000
Total current liabilities
$
11,000
Inventories
37,000
Long-term debt
180,000
Total current assets

22. $
50,000
Stockholders’ equity
Net plant and equipment
220,000
Common stock plus additional paid-in capital
15,000
Retained earnings
64,000
Total assets
$
270,000
Total liabilities and stockholders’ equity
$
270,000
Sales and costs in 2016 are projected to be 40% higher than in
2015. Both current assets and accounts payable are projected to
rise in proportion to sales. The fixed assets of Growth
Industries are operating at only 70% of capacity. Interest
expense in 2016 will equal 10% of long-term debt outstanding
at the start of the year. The firm will maintain a dividend payout

23. ratio of .50.
What is the required external financing over the next year?
Even if sales increase by 40%, the firm still has more than
enough fixed assets to meet production. Only working capital
will increase. Net working capital of the firm in 2015 was
$[removed]. The increase in net working capital will be
$[removed], which is less than the increase in the retained
earnings. Thus required external financing is $[removed]. A
negative external financing value indicates the firm will
generate more cash than it needs to finance the projected
growth. This extra cash can be used to reduce debt, repurchase
shares, increase cash reserves, or fund future growth. This extra
cash was primarily due to the firm's excess production capacity.