3. Calculate the sustainable growth rate for Pacific Coast Sailing Calculate the EFN and prepare pro forma income statements and balance sheets assuming growth at precisely this rate. Recalculate the ratios in the previous question. What do you observe?

To calculate the sustainable growth rate, we first need to find the ROE and the retention ratio, so:

Sustainable Growth Rate =

The sustainable growth rate is the growth rate the company can achieve with no external financing while maintaining a constant debt-equity ratio.

At the sustainable growth rate, the pro forma statements next year will be:

Income statementPacific Coast Sailing

Sales 2017 Balance Sheet

COGS Current AssetsCurrent liabilities

Other expenses Cash and equivalents Accounts payable

Depreciation Accounts receivable Accrued expenses

EBIT Inventory Total current liabilities

Interest Other

Taxable income Total current assets

Taxes (40%) Long-term debt

Net income Fixed assets Total long-term liabilities

Dividends

Add to RE Stockholders' equity

Preferred stock

Common stock

Capital surplus

Accumulated retained earnings

Less treasury stock

Total equity

Total assets Total liabilities and shareholders' equity

EFN =

New Ratio calculation:

RatioLower QuartileMedianUpper QuartilePacific Coast Sailing

Current ratio 0.86 1.51 1.97

Quick ratio 0.43 0.75 1.01

Total asset turnover 1.10 1.27 1.46

Inventory turnover 12.18 14.38 16.43

Receivables turnover 10.25 17.65 22.43

Debt ratio 0.32 0.56 0.61

Debt-equity ratio 0.83 1.13 1.44

Equity multiplier 1.83 2.13 2.44

Interest coverage 5.72 8.21 10.83

Profit margin5.02%7.48%9.05%

Return on assets7.05%10.67%14.16%

Return on equity14.06%19.32%26.41%

Observations: