Question

For the next fiscal​ year, you forecast net income of $ 50,000 and ending assets of $ 504,500. Your​ firm's payout ratio is 10.1 %. Your beginning​ stockholders' equity is $ 298,400 and your beginning total liabilities are $ 120,800. Your​ non-debt liabilities such as accounts payable are forecasted to increase by $ 10,400. Assume your beginning debt is $ 101,500. What amount of equity and what amount of debt would you need to issue to cover the net new financing in order to keep your​ debt-equity ratio​ constant? The Tax Cuts and Jobs Act of 2017 temporarily allows​ 100% bonus depreciation​ (effectively expensing capital​ expenditures). However, we will still include depreciation forecasting in this chapter and in these problems in anticipation of the return of standard depreciation practices during your career. The amount of equity to issue will be ​$________.

Answer 1

Net financing required = Increase in Assets- Increase in spontaneous liabilities-increase in retained earning

Total Ending assets = $504,500

Total initial assets = Equity+liabilities = 298,400+120,800 = $419,200

Hence Increase in assets = 504,500-419,200=$85,300

Increase in spontaneous liabilities = $10,400

Net Income =$50,000

10.1% will be paid out of Net Income and rest will be added to retained earning

Retained Earning increase = 50,000*(100% -10.1%)=50,000*89.9% = $44,950

Hence Net Financing Required = 85,300-10,400-44,950=$29,950

Initial Debt to Equity Ratio = Total Liabilities/ Total Equity = 120,800/298,400 = 2:5

Hence Debt Requirement = 29,950*2/(2+5) = $8,557

Equity Requirement = 29,950*5/(2+5) = $21,393

THANK YOU.