1. External Funds Needed The Phillies Company has forecast a 15.00 percent sales growth for the next year. The current financial statements are shown here:

Income Statement

Sales $38,000,000

Costs 33,400,000

Taxable Income $ 4,600,000

Taxes 1,610,000

Net Income $ 2,990,000

Dividends $1,196,000

Additions to retained earnings 1,794,000

Balance Sheet

Assets Liabilities and Equity

Current assets $9,000,000 Accounts Payable $8,000,000

Long-term debt 6,000,000

Fixed assets 22,000,000

Common stock $4,000,000

Retained earnings 13,000,000

Total equity $17,000,000

Total assets $31,000,000 Total liabilities & equity $31,000,000

a. Construct the firms pro forma Income Statement for next year.

Assume the firm keeps the same tax rate and cost ratios and profit margin.

Assume the firm keeps the same Dividend Payout Ratio.

Determine: Net Income, Dividends, Additions to retained earnings

b. Construct the firms pro forma Balance Sheet for next year.

Assume all assets (including fixed assets) increase the same percentage as sales.

Assume Accounts Payable increase the same percentage as sales (as we did in class).

Make the other assumptions that we did in class.

c. Calculate the external funds needed for next year.

d. Calculate the sustainable growth rate for the company.

e. Can Phillies eliminate the need for external funds by changing its dividend policy? (i.e., can the firm grow sales and assets 15% and bring External Funds Needed down to zero by changing its dividend policy to increase retained earnings and reduce dividends.

If the firm eliminated dividends, what would be the external funds needed?

What other options are available to the company to meet its growth objectives, if it cannot eliminate the need for external funds?