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External Financing Need Igr SGR Concept

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Pamela Abegail Monsanto
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28 views

External Financing Need Igr SGR Concept

Uploaded by

Pamela Abegail Monsanto
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as XLSX, PDF, TXT or read online on Scribd
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EXTERNAL FINANCING NEED External Financing Need is the require fund after considering

(EFN) estimated growth in sales the company impose without considering sale of equity
- What does this imply in financing
requirement? EFN = (Growth rate x Sales)- Net income (Net of Dividend)
- Factors affecting EFN
Or simply stated, How much fund needed to borrow for expected
at EFN it is assumed that funds growth in asset.
needed are borrowed and that excess
funds are used to pay debt Illustratation: Simplified Financial Statement

Statement of financial position


As at December 31, 2021
(In thousand)

Assets Liabilities
Current assets 240 Total Liability 250
Net fixed assets 360 Owners' equity 350
Total assets 600 Total Liability & Owners' 600
equity

Project sales at normal operation without expecting anything…...


Statement of financial performance
For the year 2021
(In thousand)
Actual Project
2021 2021
Sales 600 100% 600
Cost of sales 480 80% 480
Gross profit 120 20% 120
Tax due (30%) 36 6% 36
Net income 84 14% 84
The company declare 10%
dividend 8.4
Added to retained earnings 75.6

How much EFN if no estimated growth? -P75.60


EFN = 0 - (84-8.40)
EFN = -75.60

It also shows that the Liabity fell by P75.60 or P174.40 (P250-75.60)


or a debt equity ratio by (174.40 / 425.60) or 41%. Equity is up by 75.60

Statement of financial position (Revised)


As at December 31, 2021
(In thousand)

Assets Liabilities
Current assets 240 Total Liability 174.4
Net fixed assets 360 Owners' equity 425.6
Total assets 600 Total Liability & Owners' 600
equity

Note: at normal operation with zero projection liability is not affeected, in terms of EFN assets at
operation good are sold- cash or on account/ pourhase of goods- Cash or an account,
collection of receivable and pyament of liabilities are express normally.

WITH PROJECTED SALES INCREASE OF 20%


Assume that the company projected a growth sales of
20%. Compute for EFN and the effect in debt and the debt equity ratio

Projected Statement of financial position


As at December 31, 2021
(In thousand)

Assets Liabilities
Current assets 288 Total Liability 279.28
Net fixed assets 432 Owners' equity 440.72
Total assets 720 Total Liability & Owners' 720
equity

Note: at normal operation with expected growth liability increase by the difference
of the growth in sales and the net income after dividends. Additional fund received in excess are
used normally to pay current obligation

Projected Statement of financial performance


For the year ended December 31, 2021
(In thousand)
Actual Projected
2021 Growth 2021
Sales 600 120 720
Cost of sales 480 96 576
Gross profit 120 24 144
Tax due 36 7.2 43.2
Net income 84 100.8

The company declare 10%


dividend 8.4 10.08
Added to retained earnings 75.6 90.72 Added to retatined earnings or
accumulated surplus
Compute for EFN? (120-90.72) 29.28 Added to liabliity as EXTERNAL FINANCING NEEDS
Compute for growth (600*1.20%) 120
Compute for debt equity ratio (279.28/440.72) 63%
UPTO HOW MUCH RATE OF Discussion above shows how the projected growht rate affects the assets and retaiined
GROWTH CAN A BUSINESS earnings, and how much of that projected growth cause the business to resort to
EXPAND PER YEAR WITHOUT external financing need (EFN)
EXTERNAL FINANCING?
(external debt financing)
The internal growth rate shall cross the line for the management to know exactly
THE INTERNAL GROWTH RATE when the business can stand alone without resorting to external financing.
(IGR)
THE FORMULA

IGR = ROA x RETENTION RATE (Net income less Dividend)/Net income


1 less ROA x RETENTION RATE (Net income less Dividend)/ Net income

Illustrative example

Statement of financial position


As at December 31, 2021
(In thousand)

Assets Liabilities
Current assets 240 Total Liability 250
Net fixed assets 360 Owners' equity 350
Total assets 600 Total Liability & Owners' 600
equity

Statement of financial performance


For the year ended December 31, 2021
(In thousand)

Sales 600 100%


Cost of sales 480 80%
Gross profit 120 20%
Tax due (30%) 36 6%
Net income 84 14%

The company declare 10%


dividend 8.4
Added to retained earnings 75.6

IGR = 84/600 x (75.60/84)


1-84/600 x (75.60/84)

IGR = .14 x .90


1-.14 x .90

IGR = 12.60%
87.40%

IGR = 14.42%

Growth rate of 14.42% is the cross line that business can expand growth
without resort to external financing

UPTO HOW MUCH RATE OF


GROWTH CAN A BUSINESS
EXPAND PER YEAR WITHOUT
EXTERNAL EQUITY FINANCING
(Selling equity shares)
The Sustainable growth rate shall cross the line for the management to know exactly
THE SUSTAINABLE GROWTH when the business can stand alone without resorting to external equity financing
RATE (SGR)

THE FORMULA
SGR ROE x RETENTION RATE (Net income less Dividend)/Net income
1 less ROE x RETENTION RATE (Net income less Dividend)/ Net income

Illustrative example

Statement of financial position


As at December 31, 2021
(In thousand)

Assets Liabilities
Current assets 240 Total Liability 250
Net fixed assets 360 Owners' equity 350
Total assets 600 Total Liability & Owners' 600
equity

Statement of financial performance


For the year ended December 31, 2021
(In thousand)

Sales 600 100%


Cost of sales 480 80%
Gross profit 120 20%
Tax due (30%) 36 6%
Net income 84 14%

The company declare 10%


dividend 8.4
Added to retained earnings 75.6

SGR = 84/350 x (75.60/84)


1-84/350 x (75.60/84)

SGR = .24 x .90


1-.24 x .90

SGR = 21.60%
78.40%

SGR = 27.55%

Growth rate of 27.55% is the cross line that business can expand growth
without resort to external equity financing

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