Financing feedback and ROE

i
You have been given the attached information on the Crum Company. Crum
expects sales to grow by 50% in 2001, and operating costs should increase at
the same rate. Fixed assets were being operated at 40% of capacity in 2000,
but all other assets were used to full capacity. Underutilized fixed assets
cannot be sold. Current assets and spontaneous liabilities should increase at
the same rate as sales during 2001. The company plans to finance any external
funds needed as 35% notes payable and 65% common stock. After taking
financing feedbacks into account, and after the second pass, what is Crum's
projected ROE using the projected balance sheet method?
The blank worksheet for the projected balance sheet method follows.
Information on the Crum Company:
2001
2001
2000
1st pass
2nd pass
Sales
$1,000.00
Operating costs
800.00
_________
_________
EBIT
Interest
EBT
Taxes (40%)
Net Income
Dividends (60%)
Add'n to R.E.
Current Assets
Net fixed Assets
Total assets
A/P and Accruals
N/P
8.00%
Common stock
Retained earnings
Total Liab & Equity
AFN

Profit Margin
ROE
Debt/Assets
Current ratio
Payout Ratio

AFN Financing:
N/P
Common Stock

200.00
16.00
$ 184.00
73.60
_________
$ 110.40
66.24
_________
$
44.16

________

700.00
300.00
_________
$1,000.00

________

_________
_________

________

________

________

_________

________

________

150.00
200.00
150.00
500.00
_________
$1,000.00
11.04%
16.98%
35.00%
2.00 times
60.00%
Weights:
0.3500
0.6500
______
1.0000

Dollars:

Interest
Expense:

________

________

i.

Financing feedback and ROE

Growth rate:

50.00%

Sales
COGS
EBIT
Interest
Net B.T.
Tax (40%)
Net Income
Dividends (60%)
Add'n to R.E.

2000
$1,000.00
800.00
$ 200.00
16.00
$ 184.00
73.60
$ 110.40
66.24
$
44.16

2001
1st pass
$1,500.00
1,200.00
$ 300.00
16.00
$ 284.00
113.60
$ 170.40
102.24
$
68.16

2001
2nd pass
$1,500.00
1,200.00
$ 300.00
21.79
$ 278.21
111.28
$ 166.93
100.16
$
66.77

Current Assets
Net fixed Assets*

700.00
300.00

$1,050.00
300.00

$1,050.00
300.00

Total assets

$1,000.00

$1,350.00

$1,350.00

A/P and Accruals

$ 150.00
N/P
8.00%
200.00
Common stock
150.00
Retained earnings
500.00
Total Liab & Equity
$1,000.00
AFN
Cum. AFN
Profit Margin
ROE
Debt/Assets
Current ratio
Payout Ratio
AFN Financing:
N/P
Common Stock

225.00
200.00
150.00
568.16
$1,143.16
206.84
206.84

11.04%
16.98%
35.00%
2.00
60.00%
Weights
0.3500
0.6500
1.0000

225.00
272.39
284.45
566.77
$1,348.61
1.39
208.23

11.36%
23.73
37.18%
2.47
60.00%

11.13%
19.61%
36.84%
2.11
60.00%

Dollars
72.39
0.49
134.45
0.90
206.84
1.39

ROE = NI/equity = $166.93/$851.22 = 0.1961 19.61%.

With the second equity added ROE is: 166.93/852.12 = 0.1959 = 19.59%
*

1991 Sales
Current FA Capacity = Full Capacity Sales.
$1,000/0.4 = $2,500; thus FA will remain at $300.