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. INCOME STATEMENT, 2017 Sales $ 900 Costs 170 Interest 50 Taxes 120 Net income $ 560 BALANCE SHEET, YEAR-END 2016 2017 2016 2017 Assets $ 2,700 $ 3,000 Debt $ 900 $ 1,000 Equity 1,800 2,000 Total $ 2,700 $ 3,000 Total $ 2,700 $ 3,000

a. Find Eagle’s required external funds if it maintains a dividend payout ratio of 50% and plans a growth rate of 20% in 2018. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

b. If Eagle chooses not to issue new shares of stock, what variable must be the balancing item? Debt Interest Dividends Retained earnings

c. What will be the value of this balancing item?

Explanation / Answer

A) Due to increase in the assets and sales in a proportionate manner, the assets can be increased by 20%

Assets required in 2018 = Assets of 2017 + 20% of Assets of 2017
= $3000 + 20% of 3000
= $3000 + $600 = $3600

Therefore, increase in assets = $600
Net income in 2017 =$560
Dividend paid = 50% of $560 = $280
External funds required = Increase in assets - Internal funds
where, internal funds = Net Income - Dividend paid
= $560 - $280 = $280
Therefore, external funds required = $600 - $280 = $320

B) If Eagle chooses not to issue new shares of stock, the variable balancing should be only the debt component. It is because the balance amount will come from debt as the dividend payout ratio is required to be maintained. So, debts's value will be $320.

C) Debt is required to be increased by the available external funds. The value of debt will be $1000+ $320 = $1320

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