The 2017 financial statements for Growth Industries are presented below. Sales a
ID: 2804688 • Letter: T
Question
The 2017 financial statements for Growth Industries are presented below.
Sales and costs are projected to grow at 40% 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 70% 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 0.60.
What is the required external financing over the next year? (Negative amounts should be indicated by a minus sign.) Not (-27,600)!
INCOME STATEMENT, 2017 Sales $ 250,000 Costs 175,000 EBIT $ 75,000 Interest expense 15,000 Taxable income $ 60,000 Taxes (at 35%) 21,000 Net income $ 39,000 Dividends $ 23,400 Addition to retained earnings 15,600Explanation / Answer
Additional Financing Needed (AFN) = (A*/S0)S – (L*/S0) S – M(S1)(RR)
where, A* - Assets = 240,000, S0 - Current Sales = 250,000, S - Increase in sales = 100,000, L* - Current Liabilities = 15,000, M - Profit Margin = 39,000 / 250,000 = 15.6%, S1 - Next year sales = 350,000, RR - Retention Ratio = 40%
As the firm is operating at 75% capacity, total funds required would be lower
AFN = 75% x 240,000 / 250,000 x 100,000 - 15,000 / 250,000 x 100,000 - 15.6% x 350,000 x 40%
= $44,160
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.