The most recent financial statements for Fleury Inc., follow. Sales for next yea

Question

The most recent financial statements for Fleury Inc., follow. Sales for next year are projected to grow by 24 percent. Interest expense will remain constant; the tax rate and the dividend payout rate will also remain constant. Costs, other expenses, current assets, fixed assets and accounts payable increase spontaneously with sales.

If the firm is operating at full capacity and no new debt or equity is issued, what external financing is needed to support the 24 percent growth rate in sales?

(Omit the "$" sign and commas in your response. Enter your answer rounded to 2 decimal places. For example, $1,200.456 should be entered as 1200.46.)

FLEURY, INC. Income Statement Sales $ 556323 Costs 500073 Other expenses 17696 Earnings before interest and taxes $ ? Interest paid 13752 Taxable income $ ? Taxes (30%) ? Net income ? Dividends $ 8219

Explanation / Answer

Step 1: Fleury Inc. Income Statement

Step 2: Step 1: Fleury Inc.  Balance sheet

Step 3: Calculation of external financing needed (EFN)

We have

External Financing Needed = (A0/S0*(S1-S0)) - (L0/S0*(S1-S0)) - (PM*S1*b)

where

Ao - Assets (at time 0) which vary directly with Sales = 559,080

Lo - Liabilities (at time 0) which vary directly with Sales=55,976

So - Current Sales =556,323

S1 - Projected Sales = 556,323*1.24 = 689,840.52

b - Retention ratio = Addition to Retained Earnings/Net Income= 9142.40/17361.40

PM - Profit Margin = Net income/Sales = 17361.40/556323

External Financing Needed =  (559080/556,323*(689,840.52-556,323)) - (55976/556,323*(689,840.52-556,323)) - (17361.40/556323*689,840.52* 9142.40/17361.40)

= 134,179.20 - 13434.24 - 11,336.58

= 109,408.38

* Liabilities (at time 0) which vary directly with Sales usually includes accounts payable, notes payable, and accrued liabilities. But here, question specifically says that costs, other expenses, current assets, fixed assets and accounts payable increase spontaneously with sales. So notes payable is not taken.

Sales           556,323 Less: Cost of goods sold           500,073 Gross profit             56,250 Less: Other expenses             17,696 EBIT             38,554 Less: Interest             13,752 Income Before Income Tax (EBT)             24,802 Less: Income Tax@30%         7,440.60 Net Income       17,361.40 Dividend         8,219.00 Addition to Retained Earnings         9,142.40

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