Piedomont Products LTD (PPL) has current sales of $60 million. sales are expected to grow to...

Free

90.2K

Verified Solution

Question

Finance

Piedomont Products LTD (PPL) has current sales of $60 million.sales are expected to grow to $80 million next year. PPL currentlyhas accounts receivables of $9 million, inventories of $15 millionand net fixed assets of $24 million. These assets are expected togrow at the same rate as sales over the next year. Accounts payableare expected to increase from their current level of $15 million toa new level of $19 million next year. PPL wants to increase itscash balance at the end of next year by $3 million over its currentcash balance (of $2 million). Earnings after taxes next year areforecasted to be $12 million. PPL plans to pay $2 million cashdividend. PPL intends to use 10% debt in its capital structure andthe marginal tax rate is 30 percent
a. How much external financing is required by PPL nextyear?
b. What is PPL’s sustainable growth rate.

Answer & Explanation Solved by verified expert

3.8 Ratings (553 Votes)

Fig. in mlns.	Current	Expected		Increase

A/R	9	9/60*80=	12	3
Inv.	15	15/60*80=	20	5
Net F/A	24	24/60*80=	32	8
Cash	2	3	3	1
Increase in assets	50		67	17

A/P	15		19	4
Increase in liabilities				4

a.External financing needed(EFN) by PPL next year =

Required increase in assets-Reqd. increase in spontaneous liabilities-Reqd. increase in Retained Earnings

17-4-10=

Balance sheet (Current)
Assets	50	A/P	15
		Equity(Bal.fig.)	35
Total	50	Total	50

Balance sheet (projected)
Assets	67	A/P	19
		Equity(35+10)	45
		Debt(bal.fig.)	3
Total	67	Total	67

b.PPL’s sustainable growth rate

SGR=ROE*RR

SGR=Return On Equity*Retention Ratio

ie.SGR=(Net income/Total equity)*((Net Income- Dividends)/Net Income)

ie.(12/45)*((12-2)/12)=

22.22%

NOTE: Since $ 12 mlns. Is given as after-tax income, it is after deducting interest on debt, 3*10%=0.3 mlns.

Get Answers to Unlimited Questions

Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!

Membership Benefits:

Unlimited Question Access with detailed Answers
Zin AI - 3 Million Words
10 Dall-E 3 Images
20 Plot Generations
Conversation with Dialogue Memory
No Ads, Ever!
Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!

Become a Member

Transcribed Image Text

Piedomont Products LTD (PPL) has current sales of $60 million.sales are expected to grow to $80 million next year. PPL currentlyhas accounts receivables of $9 million, inventories of $15 millionand net fixed assets of $24 million. These assets are expected togrow at the same rate as sales over the next year. Accounts payableare expected to increase from their current level of $15 million toa new level of $19 million next year. PPL wants to increase itscash balance at the end of next year by $3 million over its currentcash balance (of $2 million). Earnings after taxes next year areforecasted to be $12 million. PPL plans to pay $2 million cashdividend. PPL intends to use 10% debt in its capital structure andthe marginal tax rate is 30 percenta. How much external financing is required by PPL nextyear?b. What is PPL’s sustainable growth rate.