Complete The Following Problems: Your Company Has Sales

Complete the following problems: 1. Your company has sales of $100,000 this year and cost of goods sold of $72,000. You forecast sales to increase to $110,000 next year. Using the percent of sales method, forecast next year’s cost of goods sold.

Consider a company that reported sales of $100,000 and a cost of goods sold (COGS) of $72,000. The company expects sales to grow to $110,000 in the next year. To forecast COGS for the upcoming year using the percent of sales method, we begin by calculating the current COGS as a percentage of sales, which serves as the basis for the forecast.

Current COGS as a percentage of sales is:

• COGS / Sales = $72,000 / $100,000 = 0.72 or 72%

This percentage indicates that for every dollar of sales, $0.72 is spent on COGS. Assuming that this ratio remains constant, the forecasted COGS for next year can be calculated by applying the same percentage to the projected sales of $110,000:

• Forecasted COGS = 72% of $110,000 = 0.72 × $110,000 = $79,200

Therefore, the forecasted cost of goods sold for the next year is $79,200, based on the percent of sales method.

2. Forecast net financing needed for the next fiscal year based on given financial data

Given the forecasted net income of $50,000 and ending assets of $500,000, the company's current liabilities and equity position need to be assessed to determine the net new financing required.

The firm's payout ratio is 10%, so the retained earnings, which augment stockholders' equity, will be:

Retained earnings = Net income × (1 – Payout ratio) = $50,000 × (1 – 0.10) = $50,000 × 0.90 = $45,000

The beginning stockholders' equity is $300,000, and the liabilities are split into debt and non-debt components, with non-debt liabilities forecasted to increase by $10,000.

Assuming that total liabilities include both debt and non-debt liabilities, and that total liabilities increase by $10,000, the new liabilities will be:

• Beginning liabilities = $120,000
• Increase in non-debt liabilities = $10,000
• Forecasted liabilities = $120,000 + $10,000 = $130,000

The total financing needed (TFN) is calculated as the change in total assets minus the increase in retained earnings and the change in liabilities:

TFN = (Ending assets – Beginning assets) – (Retained earnings + Increase in liabilities)

However, since ending assets are given as $500,000 and beginning assets are not specified, we operate under the assumption that the assets are growing proportionally to the financing needs. Alternatively, the direct calculation of net financing needed can be approached as:

• Net new financing needed = (Total assets at end) – (Total assets funded by retained earnings and liabilities)

Assuming the starting total assets are consistent with beginning liabilities and equity totaling:

• Beginning total assets = Beginning liabilities + Beginning stockholders' equity = $120,000 + $300,000 = $420,000

Now, the new total assets are projected at $500,000, thus the increase in assets (funding needs) is:

• Increase in assets = $500,000 – $420,000 = $80,000

Retained earnings for the year are $45,000, and the increase in liabilities is $10,000 in non-debt liabilities, which can be financed through retained earnings or new debt. The net financing needed after accounting for retained earnings and liability increase is:

• Net financing needed = Increase in assets – Retained earnings – Increase in non-debt liabilities = $80,000 – $45,000 – $10,000 = $25,000

Hence, the firm requires approximately $25,000 of net new financing to fund its growth next year.

3. Calculations of internal growth rate, sustainable growth rate, and effect of payout ratio

Given Data:

• Net income = $50,000
• Beginning total assets = $400,000
• Beginning stockholders’ equity = $250,000
• Payout ratio = 0%

a. Internal Growth Rate (IGR)

The internal growth rate reflects the maximum growth rate a firm can achieve without external financing, purely from retained earnings. Calculated as:

IGR = (ROA × Retention Ratio) / (1 – ROA × Retention Ratio)

where ROA (Return on Assets) = Net Income / Total Assets

and Retention Ratio = 1 – Payout Ratio

Calculating ROA:

ROA = $50,000 / $400,000 = 0.125 or 12.5%

Retention Ratio = 1 – 0 = 1 (since payout ratio is 0%)

Thus, IGR = (0.125 × 1) / (1 – 0.125 × 1) = 0.125 / 0.875 ≈ 0.1429 or 14.29%

b. Sustainable Growth Rate (SGR)

The sustainable growth rate considers the company maintaining its current leverage and payout ratio, calculated as:

SGR = (ROE × Retention Ratio) / (1 – ROE × Retention Ratio)

First, compute ROE (Return on Equity):

ROE = $50,000 / $250,000 = 0.20 or 20%

Retention Ratio, as before, is 1.

So, SGR = (0.20 × 1) / (1 – 0.20 × 1) = 0.20 / 0.80 = 0.25 or 25%

c. Sustainable growth rate if 40% of net income is paid as dividends

Payout ratio is 40%, thus Retention Ratio = 60% or 0.6

Using the same ROE (20%), we get:

SGR = (0.20 × 0.6) / (1 – 0.20 × 0.6) = 0.12 / (1 – 0.12) = 0.12 / 0.88 ≈ 0.1364 or 13.64%

Conclusion

These financial metrics reveal the company's capacity for growth internally and sustainably. The internal growth rate of approximately 14.3% indicates the maximum growth achievable from retained earnings alone, while the sustainable growth rate of 25% reflects growth maintained under current leverage and payout policies. Introducing dividends reduces the available retained earnings, thus lowering the sustainable growth rate to about 13.64% when 40% of net income is paid out.

4. Currency exchange calculation for pounds in London

You have $500 and the exchange rate is $1.95 per £. To find out how many pounds you can obtain:

Pounds = Amount in dollars / Exchange rate = $500 / $1.95 ≈ 256.41£

Thus, you can exchange your $500 for approximately 256.41 British pounds.

5. Calculating dollars needed to pay €500,000 at given exchange rate

The exchange rate is €0.65 per $1, which means:

$1 = €0.65

To find how many dollars are needed to pay €500,000:

Dollars needed = €500,000 / 0.65 ≈ $769,231.85

The company will need approximately $769,231.85 to pay €500,000 to its French supplier.

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