The following are the first stage and second stage pro forma financial statement

Question

The following are the first stage and second stage pro forma financial statements of Executive Fruit Company for the year ended December 2015.

How would Executive Fruit’s financial model change if the dividend payout ratio were cut to 1/3? Use the revised model to generate a new financial plan for 2015 assuming that debt is the balancing item. What would be the required external financing? (Do not round intermediate calculations.)

Dividends fall by $ . Therefore, the requirement for external financing falls from $  to $ . On the other hand, shareholders' equity will be increased by $ .

The right-hand side of the balance sheet becomes (Do not round intermediate calculations. Enter your answers in thousands.):

Explanation / Answer

Dividend Payout Ratio=Total Dividend /Income 144/216 0.67 It is cut down to .67*1/3 0.22 So dividend would be=216*.22 48 Old dividend 144 Saving in external Financing 96         Required external financing 32 PRO FORMA INCOME STATEMENT, 2015 (Figures in $ Thousands)   Revenue $ 4,400   Cost of goods sold 3,960   EBIT $ 440   Interest 80   Earnings before taxes $ 360   State and federal tax 144   Net income $ 216   Dividends 48   Additions to retained earnings $ 168 PRO FORMA BALANCE SHEET (Year-End, 2015) (Figures in $ Thousands)   Assets      Net working capital 440-144+144-96+96 $ 440      Fixed assets 1,760      Total assets $ 2,200   Liabilities and shareholders' equity      Long-term debt $ 800      Shareholders' equity 1,368      Total liabilities and shareholders' equity $ 2,168         Required external financing $ 32      Net working capital 440-144+144-96+96 this +,- is for cash and dividend payable Dividends fall by $96. Therefore requirement of external financing falls by $168 to $128 to $32. Shareholder Equity increased by $96   Liabilities and shareholders' equity      Long-term debt $ 800      Shareholders' equity 1,368      Total liabilities and shareholders' equity $ 2,168         Required external financing $ 32

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