Sales and costs are projected to grow at 20% a year for at least the next 4 year
ID: 2795939 • Letter: S
Question
Sales and costs are projected to grow at 20% a year for at least the next 4 years. Both current assets and accounts payable are projected to rise in proportion to sales. The firm is currently operating at 75% capacity, so it plans to increase fixed assets in proportion to sales. Interest expense will equal 10% of long-term debt outstanding at the start of the year. The firm will maintain a dividend payout ratio of 0.50.What is the required external financing over the next year? (Negative amounts should be indicated by a minus sign)
External financing =? The 2017 financial statements for Growth Industries are presented below INCOME STATEMENT, 2017 Sales Costs EBIT Interest expense Taxable income Taxes (at 35%) Net income 218,000 155,006 $ 55,000 11,800 $44,800 15,400 $ 28,600 Dividends Addition to retained earnings 5 14,308 14, 300 BALANCE SHEET, YEAR-END, 2017 Assets Liabilities Current assets Current liabilities Cash Accounts receivable Inventories $4,0e0 9,000 Accounts payable Total current 1liabilities $ 11,80e S 11,e00 110,000 27-90 Long-term debt $ 40,08 Stockholders' equity Total current assets Common stock plus additional paid-in capital Retained earnings 150,000 15,000 54,000 s 19e,e00 Net plant and equipment Total assets s 190,8 Total liabilities and stockholders' equity
Explanation / Answer
The firm irrespective of changes in current assets, account payables, long term debt outstanding, stockholder's equity and more needs to maintain the following fundamental equality of double entry accounting :
Total Assets = Stockholder's Equity + Total Liabilities - (Equation 1)
Total Current Assets = 40000 $ , Current Assets Next Year = 1.2 x 40000 = 48000 $ (grows in proporstion to sales and sales growth is 20% annually)
Similarly, Accounts Payable Next Year = 11000 x 1.2 = 13200 $ = Total Current Liabilities (Next Year)
Current Net Plant and Equipment = Current Fixed Assets = $190000
Fixed Assets grow annually at 20% (in proportion to sales growth of 20%)
Therefore, Fixed Assets Value Next Year = 150000 x 1.2 = $180000
Therefore, Total Assets Next Year = Fixed Asset Value + Total Current Assets = 180000 + 48000 = $228000
Since, the total assets of the firm increases in a year, the other side of equation 1 has to increase by the same amount to maintain equality.
Stockholder's Equity + Paid In Capital = $15000 (remains constant over one year)
Calculation of Retained Earnings (for Next Year) : All figures are for next year
Sales = 210000 x 1.2 (grows by 20% from current year) = $252000
Less: Costs = 155000 x 1.2 (grows by 20% from current year) = $186000
EBIT = $66000
Less: Interest Expense = 0.1 x 110000 = $11000 ( because interest expense is 10% of long term outstanding debt at the beginning of the year which is $110000)
Taxable Income = $55000
Less: Tax @35% = $19250
Net Income =$ 35750
Since, dividend payout ratio (or the proportion of net income paid out as dividend) is maintained at 0.5, Dividends for next year = 0.5 x Net Income = $17875.
Therefore, Retained Earnings accrued next year = Net Income Less Dividen Payouts = $17875
Total Retained Earnings at the end of Next Year = Existing retained earnings + Retained Earnings accrued = 54000+17875 =$ 71875
Account Payables Next Year = Total Current Laibilities = $13200
Existing Long Term Debt = $110000 (given) and Let external financing required be K
Therefore, in order to maintain equation 1 :
Total Assets (Next Year) = Total Current Liabilities (Next Year) + Stockholder's Equity & Paid In Capital + Total Retained Earnings + Existing Long Term Debt + External Financing Required
228000 = 13200 + 15000 + 71875 + 110000 + K
Solving this equality above we get K = $17925
Therefore, the firm needs external financing amounting to $17925 over the bext year.
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.