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Question

You have been given the information below on the Crum Company. Crum expects sales to grow by 50% in 2011, and operating costs should increase at the same rate. Fixed assets were being operated at 40% of capacity in 2010, but all other assets were used to full capacity. Underutilized fixed assets cannot be sold. Current assets and spontaneous liabilities should increase at the same rate as sales during 2011. The company plans to finance any external funds needed as 35% notes payable and 65% common stock. After taking financing feedbacks into account, and after the second pass, what is Crum's projected ROE using the projected balance sheet method?

Information on the Crum Company:

2010 2011
1st pass 2011
2nd pass

Sales $1,000.00

Operating costs 800.00

EBIT $ 200.00

Interest 16.00

EBT $ 184.00

Taxes (40%) 73.60

Net Income $ 110.40

Dividends (60%) 66.24

Add'n to R.E. $ 44.16

Current Assets $ 700.00

Net fixed Assets 300.00

Total assets $1,000.00

A/P and Accruals $ 150.00

N/P 8.00% 200.00

Common stock 150.00

Retained earnings 500.00

Total Liab & Equity $1,000.00

AFN

Profit Margin 11.04%

ROE 16.98%

Debt/Assets 35.00%

Current ratio 2.00 times

Payout Ratio 60.00%

AFN Financing:
Weights:
Dollars: Interest
Expense:

N/P 0.3500

Common Stock 0.6500

Growth rate: 50.00% 1.0000

a. 16.98%

b. 23.73%

c. 25.68%

d. 19.61%

e. 23.24%

Answer

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