Question

The most recent financial statements for Kerch, Inc., are shown here (assuming no income taxes):

Income Statement		Balance Sheet
Sales	$5,100	Assets	$14,900	Debt	$10,300
Costs	3,430			Equity	4,600
Net income	$1,670	Total	$14,900	Total	$14,900

Assets and costs are proportional to sales. Debt and equity are not. No dividends are paid. Next year's sales are projected to be $5,977.

What is the external financing needed?

Answer 1

Net Profit Margin = Net Income/ Sales

=1670/ 5100

=32.74509804%

Dividend Payout Ratio = Dividends / Net profit

=0/ 1670

= 0

Increase in Assets = Total Assets / Current Sales * Change in Sales

= 14900 /5100* (5977-5100)

=2,562.215686

Increase in Current Liabilities = Current Liabilities / Current Sales * Change in Sales

= 0

Earnings Retained = revised sales * Net profit margin * (1- dividend payout ratio)

=5977*32.74509804%*(1-0)

= $ 1,957.17451

External Financing Needed = Increase in Assets - Increase in Current Liabilities - Earnings Retained

=2,562.215686-0-1,957.17451

= $ 605.04

Hence the correct answer is $ 605.04