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E3-14. Sustainable Growth Rate. Microsoft Corporation reports the following infor- mation in a recent financial statement.
850
Accounts receivable. . . . . . . . . . . . . . . . . . . . . . . . . . 150
Inventory. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 195
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,750
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,900
Liabilities and Equity
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,875
Total equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,025
Total liabilities and equity . . . . . . . . . . . . . . . . . . . . . . $3,900
The following assumptions apply to the forecast of the next five months' operations
for The Pacific Company:
a. Sales revenues will grow at a constant 5 percent each month.
b. Cost of goods sold will be a constant 30 percent of sales revenue.
c. Other expenses will grow at a constant monthly rate of 4 percent. December
other expenses were $80
Dividends will be paid out monthly at a rate of 18 percent of net income.
e. Cash will be collected at a rate of 65 percent of current month sales and the
remaining 35 percent will be collected the following month. December sales
were $300.
f. Payments will be made in the month supplies are delivered. The Pacific
Company requires supplies two months ahead of sales; hence cash
disbursements are estimated to be equal to the following two months' cost of
goods sold, plus the current month's other expenses and dividends.
g. Other assets grow at a 5 percent monthly rate.
h. There will be no additional equity additions. Total equity will increase by the
amount of retained earnings increases.
i. Total liabilities will increase by an amount needed to keep total liabilities
plus total equity equal to total assets.
Required:
1. Prepare the following for The Pacific Company's next four months:
a. A budgeted income statement
b. A budgeted balance sheet
c. A cash flow budget
2. Compute the strategic growth rate for The Pacific Company for the next four
months.
3. Comment on the company's SGR relative to its growth in sales revenue.
