Eagle Sports Supply has the following financial statements. Assume that Eagle\'s

Question

Eagle Sports Supply has the following financial statements. Assume that Eagle's assets are proportional to its sales. Find Eagle's required external funds if it maintains a dividend payout ratio of 60% and plans a growth rate of 15% in 2016. (Do not round intermediate calculations. Round your answer to 2 decimal places.) If Eagle chooses not to issue new shares of stock, what variable must be the balancing item? What value will appear on the adjusted balance sheet for the balancing variable? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Now suppose that the firm plans instead to increase long term debt only to $1.000 and does not wish to issue any new shares of stock. What will be the value of dividend payment now? (Do not round intermediate calculations. Round your answer to the nearest whole number.)

Explanation / Answer

a. Assumed that the Net assets are in proportion to sales

Net assets to sales = 4600 / 1700 = 2.71 times

Growth Rate = 15%

Sales = 1700 + 15% of 1700 = $1955

Net Assets = 1955 * 2.71= $5298.05

External Financing Need = $5298.05 - $4600 = $698.05

It can be raised through either debt or equity but if the same debt-equity ratio is to be maintained then,

Debt- equity ratio = debt/ equity = 900/3700 = 0.24

This external financing will be raised through

Debt = 698.05* 0.24 = $167.53

Equity = 698.05 - 167.53 = $530.518

b-1 Debt

b-2 $698.05 will appear in the balance sheet as raising of new debt i.e in addition to debt of $900

The Debt wpuld now show a balance of $900 +  $698.05 = $1598.05

c. If no new shares are to be issued then the Dividend paid would be same sa before i.e 1020 * 60%= $612

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