Question

Refer to the following financial statements and answer the questions:

Answer the following questions:

1. Determine which items varied in constant proportion to sales between 20x6 and 20x7.
2. Determine the rate of growth in sales that was achieved from year 20x6 to 20x7.
3. What was the firm’s return on equity for 20x7? Can you calculate for 20x6?
4. What was the firm’s external (additional) funding requirement determined to be for 20x? How was the funding obtained? (hint: compare the changes in debts and equities).

Income statement
			20x6	20x7
	Sales		$1,200,000	$1,500,000
	Cost of goods sold		$750,000	$937,500
	Gross margin		$450,000	$562,500
	Operating expense
		Advertising expense	$50,000	$62,500
		Rent expense	$72,000	$90,000
		Sales commission	$48,000	$60,000
		Utilities	$15,000	$18,750
	EBIT		$265,000	$331,250
	Interest expense		$106,000	$113,000
	Taxable income		$159,000	$218,250
	Tax (35%)		$55,650	$76,388
	Net Income		$103,350	$141,863
	Dividend (40% payout)		$41,340	$56,745
	Change in return earnings		$62,010	$85,118

Balance sheet
			20x6	20x7
	Assets
		Cash	$300,000	$375,000
		Receivables	$200,000	$250,000
		Inventory	$700,000	$875,000
		Property, plant and equipment	$1,800,000	$2,250,000
	Total assets		$3,000,000	$3,750,000
	Liabilities
		Payables	$300,000	$375,000
		Short-term debt (10 % interest)	$500,000	$989,882
		Long-term debt (7% interest)	$800,000	$900,000
	Shareholders' equity
		Common stock	$1,100,000	$1,100,000
		Retained earnings	$300,000	$385,118
	Total liabilities and equity		$3,000,000	$3,750,000

Answer 1

a)variation in sales from 20x6 to 20x7= 1500000-1200000= 300000

percentage change= 300000/1200000 = 25%

COGS increased by 25% from 750000 to 937500

gross margin increased by 25%

advertising expense, rent expense, sales commission and utilities expense also increased by 25%

ebit also increased by 25%

b) rate of growth of sales= 1500000-1200000= 300000

percentage growth= 300000/1200000*100= 25%

c) return on equity= net income/ shareholders equity

for 20x6= 103350/1100000

= 0.093 or 9.3%

for 20x7= 141863/1100000

=0.128 or 12.8%

d) firms additional funding sources in20x7

payables-75000

short term debt-489882

long term debt- 100000