Question

Problem 19-11 EFN (L04, CFA8)

The most recent financial statements for Martin, Inc., are shown here:

Income Statement
Sales	$20,500
Costs	−12,300
Taxable income	$8,200
Taxes (21%)	−1,722
Net income	$6,478

Balance Sheet
Assets	$77,900		Debt	$33,000
			Equity	44,900
Total	$77,900		Total	$77,900

Assets and costs are proportional to sales. Debt and equity are not. A dividend of $865 was paid, and Martin wishes to maintain a constant payout ratio. Next year’s sales are projected to be $23,780. What is the external financing needed? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Answer 1

Percentage increase in sales = ($23,780 - $20,500) / $20,500 = 16%

Taxable income = Sales - costs = $23,780 - $12,300* (1 + 16%) = $9,512

Net income = Taxable income * (1 - Tax rate) = $9,512 * (1 - 21%) = $7,514.48

Dividend payout ratio = $865 / $6,478 = 13.35%

Addition to retained earnings = Net income * (1 - payout ratio)
= $7,514.48 * (1 - 0.1335)
= $6,511.08

External financing needed = Increase in assets - addition to retained earnings
= ($77,900 * 16%) - $6,511.08
= $12,464 - $6,511.08
= $5,952.92

External financing needed = $5,952.92