Problem:
You have been provided financial information (see following page) of the Crum Company (CC). The firm expects sales to grow by 50% next year, and operating costs should increase at the same rate. Fixed assets were being operated at 40% of capacity this past year, but all other assets were used to full capacity. Underutilized fixed assets cannot be sold. Current assets and spontaneous liabilities (A/P and Accruals) should increase at the same rate as sales next year. CC plans to finance any Additional Funds Needed (AFN) as 35% Notes Payable (short-term debt) and 65% common stock (Common Equity). After taking financial feedbacks (refer to pages 497-505) into account, and after the 2nd pass, determine CC’s projected Return on Equity (ROE = Net Income / Common Equity) using the Percent of Sales Method.
Is the ROE:
a. 16.98%
b. 23.73%
c. 25.68%
d. 19.61%
e. 23.24%
SHOW ALL WORK.
Crum Company Financial Information: Growth rate = 50%
| Income Statement |
Past Year
|
Next Year
1st Pass
|
Next Year
2nd Pass
|
Next Year
Final
|
|
Sales
|
$ 1,000.00
|
|
|
|
|
Operating Costs, 80%
|
800.00
|
|
|
|
|
EBIT
|
200.00
|
|
|
|
|
Interest
|
16.00
|
|
|
|
|
EBT
|
184.00
|
|
|
|
|
Taxes, 40%
|
73.60
|
|
|
|
|
Net Income
|
110.40
|
|
|
|
|
Dividends, 60%
|
66.24
|
|
|
|
|
Addition to Retained Earnings
|
44.16
|
|
|
|
|
BALANCE SHEET
|
|
|
|
|
|
Current Assets
|
$ 700.00
|
|
|
|
|
Net Fixed Assets
|
300.00
|
|
|
|
|
Total Assets
|
$ 1,000.00
|
|
|
|
|
|
|
|
|
|
|
A/P and Accruals
|
$ 150.00
|
|
|
|
|
N/P, 8%
|
200.00
|
|
|
|
|
Common Stock
|
150.00
|
|
|
|
|
Retained Earnings
|
500.00
|
|
|
|
|
Total Liabilities & Common Equity
|
$ 1,000.00
|
|
|
|
|
AFN
|
Past Year
|
Next Year, 1st Pass
|
Next Year, 2nd Pass
|
|
Profit Margin
|
11.04%
|
|
|
|
ROE
|
16.98%
|
|
|
|
Debt / Assets
|
35.00%
|
|
|
|
Current Ratio
|
2.0 times
|
|
|
|
Payout Ratio
|
60.00%
|
|
|
|
AFN Financing
|
Weights
|
Dollars
|
Interest Expense
|
|
Notes Payable
|
0.3500
|
|
|
|
Common Stock
|
0.6500
|
|
|
|
TOTAL
|
1.0000
|
|
|