The 2017 financial statements for Growth Industries are presented below. Sales a
ID: 2800341 • Letter: T
Question
The 2017 financial statements for Growth Industries are presented below.
Sales and costs are projected to grow at 30% 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.)
INCOME STATEMENT, 2017 Sales $ 240,000 Costs 170,000 EBIT $ 70,000 Interest expense 14,000 Taxable income $ 56,000 Taxes (at 35%) 19,600 Net income $ 36,400 Dividends $ 18,200 Addition to retained earnings 18,200 BALANCE SHEET, YEAR-END, 2017 Assets Liabilities Current assets Current liabilities Cash $ 7,000 Accounts payable $ 14,000 Accounts receivable 12,000 Total current liabilities $ 14,000 Inventories 21,000 Long-term debt 140,000 Total current assets $ 40,000 Stockholders’ equity Net plant and equipment 180,000 Common stock plus additional paid-in capital 15,000 Retained earnings 51,000 Total assets $ 220,000 Total liabilities and stockholders' equity $ 220,000Sales and costs are projected to grow at 30% 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.)
Explanation / Answer
External Financing required is calculated as the excess of required increase in assets over the increase in liabilites and increase in retained earnings. External Financing required = Increase in assets - Increase in liabilities - Increase in retained earnings Increase in assets = 2017 assets * sales growth % = $220000 * 30% = $66,000 Increase in Liabilities = 2017 Accounts Payable * sales growth % = $14000 * 30% = $4200 Increase in retained earnings = $25,025 External Financing required = $66000 - $4200 - $25025 = $36,775 Calculation of increase in retained earnings Sales $312,000 Less : Costs $221,000 EBIT $91,000 Less : Interest Expense $14,000 Taxable Income $77,000 Less : Taxes @ 35% $26,950 Net Income $50,050 Less : Dividend payout (50%) $25,025 Increase in retained earnings $25,025
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.