Question

+ 1. You have obtained the following Information for Blue Bell Farms. The tax rate is 34 percent. Cash Net fixed assets Accrued expenses Inventory Long-term debt Sales Costs Accounts payable Depreciation Interest paid Accounts receivable Dividends paid 124 2,498 135 1,027 1,876 3,850 2,220 486 321 136 518 281 a. Construct a balance sheet and income statement. b. What is the debt-equity ratio? c. What is profit margin? d. What is Dupont identity? e. What is sustainable growth rate? 1. Let's assume that next year sales projected to be 4620 (20%), what should be external financing need (EFN)?

Answer 1

a.
Income Statement
Sales	3,850
Expenses
Costs	2,220
Depreciation	321
Interest paid	136
Total expenses	2,677
Profit	1,173
Dividends	(281)
Profits transferred to Retained Earnings	892
Balance Sheet
Current assets
Cash	124
Inventory	1,027
Accounts receivable	518
Total current assets	1,669
Non-current assets
Net fixed assets	2,498
Total non-current assets	2,498
Total assets	4,167
Current liabilities
Accrued expenses	135
Accounts payable	486
Total current liabilities	621
Non-current liabilities
Long-term debt	1,876
Total non-current liabilities	1,876
Total liabilities	2,497
Owners' equity (bal.figure)	1,670
Total liabilities & owners equity	4,167
b.
Debt equity ratio is a measure of the degree to which a company is
financing its operations through debt as against wholly owned funds
Debt equity ratio = Total liabilities / Stockholder's equity
Debt equity ratio = 2497/1670
Debt equity ratio = 1.50
c.
Profit margin ratio shows the amount of net profit generated as a
percentage of revenue
Profit Margin = Net Profit/Net Sales
Profit Margin = 1173/3850
Profit Margin = 30.48%
d.
Dupont identity
Dupont identity is an expression that shows a company's return on
equity as a product of the profit margin,total assets turnover and the
financial leverage ratio of the company
Under Dupont identity
ROE = Profit Margin * Asset Turnover * Financial Leverage
Asset Turnover = Revenues/Total assets
Asset Turnover = 3850/4167
Asset Turnover = 0.92
Financial Leverage = Total assets/Stockholder's equity
Financial Leverage = 4167/1670
Financial Leverage = 2.50
ROE = 30.48% * 0.92 * 2.50
ROE = 0.70
ROE = 70%
Sustainable growth rate is the rate a business can increase its income
without having to borrow more money from lenders and investors.
e.
Sustainable growth rate = Earning Retention Rate * ROE
Earning Retention Rate = 100% - Dividend Payout Rate
Dividend Payout Rate = Dividend/Net Income
= 281/1173
= 0.24
= 24%
Earning Retention Rate = 100% - Dividend Payout Rate
= 100% - 24%
= 76%
Sustainable growth rate = Earning Retention Rate * ROE
= 70% * 76%
= 53.20%
f.
Since, the sustainable growth rate of 53.20% is higher than the projected
growth rate of 20%, the external financing need is ZERO
EFN = NIL