E3-14. Sustainable Growth Rate. Microsoft Corporation reports the following infor-

mation in a recent financial statement. ($ millions except for Earnings per share and

Dividends per share)

Year 1 Year 2 Year 3

Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $58,437 $62,484 $69,943

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,569 18,760 23,150

Shareholders' equity. . . . . . . . . . . . . . . . . . . . . . . 39,558 46,175 57,083

Earnings per share . . . . . . . . . . . . . . . . . . . . . . . . 1.63 2.13 2.73

Dividends per share . . . . . . . . . . . . . . . . . . . . . . . 0.52 0.52 0.64

Use the above information to compute Microsoft's sustainable growth rate for

Years 2 and 3 and comment on Microsoft's sustainable growth rate relative to its

actual rate of growth.

E3-15. Comprehensive Budgeting. The Pacific Company reports the following finan-

cial data for its first year of operations ($ thousands):

THE PACIFIC COMPANY

Income Statement

For the Year Ended December 31, 2015

Sales revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $300

Cost of goods sold. . . . . . . . . . . . . . . . . . . . . . . . . . . 90

Gross profit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 210

Other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $130

THE PACIFIC COMPANY

Balance Sheet

December 31, 2015

Assets

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 850

Accounts receivable. . . . . . . . . . . . . . . . . . . . . . . . . . 150

Inventory. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 195

Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,750

Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,900

Liabilities and Equity

Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,875

Total equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,025

Total liabilities and equity . . . . . . . . . . . . . . . . . . . . . . $3,900

The following assumptions apply to the forecast of the next five months' operations

for The Pacific Company:

a. Sales revenues will grow at a constant 5 percent each month.

b. Cost of goods sold will be a constant 30 percent of sales revenue.

c. Other expenses will grow at a constant monthly rate of 4 percent. December

other expenses were $80

Dividends will be paid out monthly at a rate of 18 percent of net income.

e. Cash will be collected at a rate of 65 percent of current month sales and the

remaining 35 percent will be collected the following month. December sales

were $300.

f. Payments will be made in the month supplies are delivered. The Pacific

Company requires supplies two months ahead of sales; hence cash

disbursements are estimated to be equal to the following two months' cost of

goods sold, plus the current month's other expenses and dividends.

g. Other assets grow at a 5 percent monthly rate.

h. There will be no additional equity additions. Total equity will increase by the

amount of retained earnings increases.

i. Total liabilities will increase by an amount needed to keep total liabilities

plus total equity equal to total assets.

Required:

1. Prepare the following for The Pacific Company's next four months:

a. A budgeted income statement

b. A budgeted balance sheet

c. A cash flow budget

2. Compute the strategic growth rate for The Pacific Company for the next four

months.

3. Comment on the company's SGR relative to its growth in sales revenue.