The product and marketing departments at ABC Corp are estimating a growth rate of 15 percent for next year Consider the two distinct scenarios below a Assume fixed assets increase proportionally to sales and will be depreciated at a similar rate to existing fixed assets b Assume that, to increase production, ABC Corp must set up an entirely new location at a cost of $10,000,000 The new fixed assets will be depreciated at 10 a year Given the scenarios above Calculate the EFN for the company for each of the scenarios assuming the company is operating at full capacity today (i e 100 utilization) Can the company's sales increase at this growth rate What will be the capacity utilization for the company next year Discuss the methodology used above What would you likely change if you operated in an environment in which certain balance sheet items dont vary proportionally with sales A B D E F 1 Income Statement 2 Sales $80,518,460 3 COGS $58,672,892 4 Other expenses $10,210,200 5 Depreciation $3,608,440 6 EBIT $8,026,928 7 Interest $1,261,040 8 Taxable income $6,765,888 9 Taxes (40 ) $2,706,355 10 Net income $4,059,533 11 12 Dividends $1,220,000 13 Add to RE $2,839,533 14 15 16 Balance Sheet 17 Assets Liabilities and Equity 18 Current assets Current liabilities 19 Cash $912,870 Accounts payable $1,858,010 20 Accounts rec $1,466,250 Notes payable $4,242,700 21 Inventory $2,146,360 Total CL $6,100,710 22 Total CA $4,525,480 23 Long term debt $11,000,000 24 Fixed assets 25 Net PP E $35,446,860 Shareholder equity 26 Common stock $800,000 27 Retained earnings $22,071,630 28 Total equity $22,871,630 29 30 Total Assets $39,972,340 Total L E $39,972,340 31 32

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The product and marketing departments at ABC Corp are estimating a growth rate of 15 percent for next year. Consider the two distinct scenarios below:

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The product and marketing departments at ABC Corp are estimating a growth rate of 15 percent for next year. Consider the two distinct scenarios below:

a. Assume fixed assets increase proportionally to sales and will be depreciated at a similar rate to existing fixed assets. b. Assume that, to increase production, ABC Corp must set up an entirely new location at a cost of $10,000,000. The new fixed assets will be depreciated at 10% a year.

Given the scenarios above:

Calculate the EFN for the company for each of the scenarios assuming the company is operating at full capacity today (i.e. 100% utilization). Can the company's sales increase at this growth rate? What will be the capacity utilization for the company next year?
Discuss the methodology used above. What would you likely change if you operated in an environment in which certain balance sheet items dont vary proportionally with sales?

A B D E F 1 Income Statement 2 Sales $80,518,460 3 COGS -$58,672,892 4 Other expenses -$10,210,200 5 Depreciation -$3,608,440 6 EBIT $8,026,928 7 Interest -$1,261,040 8 Taxable income $6,765,888 9 Taxes (40%) -$2,706,355 10 Net income $4,059,533 11 12 Dividends $1,220,000 13 Add to RE $2,839,533 14 15 16 Balance Sheet 17 Assets Liabilities and Equity 18 Current assets Current liabilities 19 Cash $912,870 Accounts payable $1,858,010 20 Accounts rec. $1,466,250 Notes payable $4,242,700 21 Inventory $2,146,360 Total CL $6,100,710 22 Total CA $4,525,480 23 Long-term debt $11,000,000 24 Fixed assets 25 Net PP&E $35,446,860 Shareholder equity 26 Common stock $800,000 27 Retained earnings $22,071,630 28 Total equity $22,871,630 29 30 Total Assets $39,972,340 Total L&E $39,972,340 31 32