Problem

EFN Define the following: S = Previous year’s sales A = Total assets E = Total eq...

EFN Define the following:

S = Previous year’s sales

A = Total assets

E = Total equity

g = Projected growth in sales

PM = Profit margin

b = Retention (plowback) ratio

Assuming that all debt is constant, show that EFN can be written as:

EFN = – PM(S)b + [A – PM(S)b] × g

Hint: Asset needs will equal A × g . The addition to retained earnings will equal PM(S) b × (1 + g ).

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