Pro Forma Chapter 4

CHAPTER 3 TUTORIAL SOLUTIONS

21. Assuming costs vary with sales and a 20 percent increase in sales, the pro forma income statement will look like this: MOOSE TOURS INC. Pro Forma Income Statement Sales $ 1,114,800 Costs 867,600 Other expenses 22,800 EBIT $ 224,400 Interest 14,000 Taxable income $ 210,400 Taxes(35%) 73,640 Net income $ 136,760 The payout ratio is constant, so the dividends paid this year is the payout ratio from last year times net income, or: Dividends = ($33,735/$112,450)($136,760) Dividends = $41,028

And the addition to retained earnings will be: Addition to retained earnings
Increasing fixed assets would also not be a good idea since the company already has enough fixed assets. A likely scenario would be the repurchase of debt and equity in its current capital structure weights. The company’s debt/assets and equity/assets are: Debt/assets = .7526 / (1 + .7526) = .43 Equity/assets = 1 / (1 + .7526) = .57 So, the amount of debt and equity needed will be: Total debt needed = .43($679,080) = $291,600 Equity needed = .57($679,080) = $387,480 So, the repurchases of debt and equity will be: Debt repurchase = ($98,600 + 216,444) – 291,600 =
Since the company issued no new equity, shareholders’ equity increased by retained earnings. Retained earnings for the year were: Retained earnings = NI – Dividends Retained earnings = $95,000 – 42,000 Retained earnings = $53,000 So, the equity at the end of the year was: Ending equity = $230,000 + 53,000 Ending equity = $283,000 The ROE based on the end of period equity is: ROE = $95,000 / $283,000 ROE = .3357 or 33.57% The plowback ratio is: Plowback ratio = Addition to retained earnings/NI Plowback ratio = $53,000 / $95,000 Plowback ratio = .5579 or 55.79%

Using the equation presented in the text for the sustainable growth rate, we