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The most recent financial statements for CorpFin Sdn Bhd., follow. Sales for 2011 are projected to grow by 12 percent.
Income Statement for the year ended December 31, 2010
RM’000RM’000
Sales 30,499,000
Costs22,224,580
Depreciation 1,366,260
Other Expenses 3,867,500
Earnings Before Interest and Tax 3,040,660
Interest paid 478,240
Taxable Income 2,562,420
Taxes (40%) 1,024,968
Net Income 1,537,452

Dividends560,000
Addition to Retained Earnings977,452

Balance Sheet as at December 31 2010
RM’000RM’000RM’000
Net Fixed Assets 16,122,400

Current Assets:
Cash 441,000
Accounts receivable 708,400
Inventory 1,037,120
2,186,520
Current Liabilities:
Accounts payable 889,000
Notes Payable2,030,000 (2,919,000)

Net Working Capital (732,480)
Net Total Assets 15,389,920

Financed by:
Equity:
Ordinary shares and paid-in surplus 350,000
Retained Earnings 9,719,920 10,069,920

Long-term debt 5,320,000
Long-term debt and equity 15,389,920
Required
i. Calculate the internal rate and sustainable growth rate for CorpFin Sdn Bhd. What do these numbers mean? 10 marks ii. Calculate the EFN for the company assuming the company is operating at full capacity. Can the company’s sales increase at 12 percent growth rate as forecast? 12 marks iii. Appropriate the EFN into the short term and long term financial requirements 5 marks

iv. What would be your answer assuming the firm is operating at 80% of full capacity? 2marks v. Assuming the firm increases its net fixed assets by RM400,000, what would be the new EFN? 6marks Solution

i. Internal Growth Rate (IGR)
IGR = ROA x b
1-(ROA x b)
ROA = Net Income/Total Asset
0.08x0.641-0.08 x 0.64

= 0.05

Sustainable Growth Rate (SGR)
SGR = ROE x b
1-(ROE x b)
ROE = Net Income/Total Equity
0.15x0.641-0.15 x 0.64

= 0.11

ii.
Balance Sheet
AssetsLiabilities and Stockholders’ Equity
Cash RM493,920Accounts payables RM 995,680 Accounts receivables 793,408Notes payables2,030,000 Inventories 1,161,574.40 Total current assets RM2,448,902.40Total current liabilities RM3,025,680

Net fixed assets 18,057,088Long- term debt 5,320,000
Common stock 350,000
Add to Retained earnings10,914,640
Total assets $20,506,091.40 Total liabilities and equity $19,610,320

EFN =RM 895,670.40

Income Statement
RevenuesRM34,158,880.00
Costs 24,891,529.60
Gross Margin 9,287,350.40
Other Expenses 4,331,600.00
Depreciation 1,366,260.00
EBIT 3,589,490.40
Interest 478,240.00
EBT RM3,111,250.40
Taxes (40%) 1,244,500.16
Net incomeRM 1,866,750.24

DividendsRM672,030.09
Retained earningsRM1,194,720

iii. Change in Working Capital
= Change in Current Asset – Change in Current Liability

= RM262,382.40 – RM133,680 = RM 128,702.40
= EFN – Change in Working Capital = Long term EFN
RM895,670.40 – RM128,702.40 = RM 766,968.

iv. 0.80 Full capacity = RM30,499,000
FC sales = RM30,499,000/0.8
RM38,123,750.
Since sales at 12% growth is RM 34,158,880 and lesser than sales at full capacity value at RM30,499,000/0.8, the increase in the Fixed assets requirement may not be necessary. Therefore, the Total Asset should be RM18,571,302. EFN = RM18,571,302.4 – RM19,610,320 = - RM 1, 039,017.60

The company should pay more dividends and retain RM 155,702.40

v.
Balance Sheet
AssetsLiabilities and...
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