Market -to-book ratio 1.25

Q: You just started a new job as a Finance Manager at XYZ Corp. As you are starting to get acquainted with the company, you requested the Balance Sheet as of December 31, 2015, the 2015 Income Statement and a few other items that you deemed appropriate. As you are trying to get a better grasp of the growth potential of the company, you decide to look the the IGR and SGR numbers.

(a) Compute the IGR and SGR.

One of your analysts mentioned that the Marketing and Sales departments are forecasting a growth in sales of 10%. Additionally, the same analyst informed you that the firm is at capacity right now and any further growth would require an investment in fixed assets of $5 million dollars. Before your meeting with the new CEO, you decided to get a sense of what the impact of such growth would be:

(c) What is the EFN for a growth of 10% in sales and the capacity assumption above? Also assume that the dividend payout ratio remains constant, and that cost of goods sold, current assets and accounts payable grow proportionally to sales.

(d) What does the number you computed mean?

(e) Suppose you decide to raise any needed capital through long term debt with no interest payments in the coming year. What is your new Debt-Equity Ratio? Is it larger or smaller than the Debt-Equity Ratio you currently have? Does it violate the IGR or SGR you computed before? Why is that?

Income Statement 2015 $43,000,000 Taxes: Sales 40% $30,000,000 COGS Shares outstanding 1,000,000 $5,000,000 Other expenses Depreciation $2,000,000 $6,000,000 EBIT $2,000,000 nterest $4,000,000 Taxable income Taxes (40%) $1,600,000 Net income $2,400,000 Dividends $600,000 Add to RE $1,800,000 Balance Sheet, Dec 31, 2015 Liabilities & Owners' Equity Assets Current Assets Current Liabilities ash $500,000 Accounts Payable $1,000,000 Notes Payable $3,000,000 Accounts Receivable $1,000,000 Inventory $2,000,000 Total CL $4,000,000 Total CA Long Term Debt $10,000,000 $3,500,000 Fixed Assets Owners' Equity Common Stock $6,500,000 Net PP&E $25,000,000 Retained Earnings $8.000,000 Total Equity $141500,000 Total L & O $28.500.000 Total Assets $28.500.000