Question

For the next fiscal year, Kramer Corporation is forecasting net income to be $50 millions and ending assets to be $329 millions. The firm mantains a payout ratio of 50%. Kramer’s beginning stockholder’s equity is $180 millions and their beginning total liabilities are $90 millions. Kramer’s non-debt liabilities such as accounts payable are forecasted to increase by $12 millions. Using the percent sales method, is Kramer Co. predicting to have a surplus or a deficit next year, and how much is it?

Answer 1

Given:

Net income forecasted = $50 million

Beginninng shareholders equity = $180 million

Since the payout ratio is 50% so $25 millions will be distributed to investors and remaining $25 millions will be added to shareholders equity.

So the shareholders equity next year = $180+$25=$ 205 millions.

Surplus/ deficit = Assets-Shareholders equity-Total Liabilites - increase in non-debt liabilities

=329-205-90-12

=$22 millions

So the company will have a surplus of $22 millions.