Question

. Financial statements of ABC company for the year 2018 is provided below. Company expects to...

. Financial statements of ABC company for the year 2018 is provided below. Company expects to its sales, costs and total assets to grow 20% in year 2019. Interest expense in 2019 will be 10% of long-term debt outstanding at the start of the year. If company plans to maintain current payout ratio in 2019, how much external financing will the firm require in 2019? Tax rate will remain constant.

INCOME STATEMENT, 2018

Sales

$200,000

Costs

150,000

EBIT

50,000

Interest Expense

10,000

Taxable income

40,000

Taxes (35%)

14,000

Net Income

Dividends

26,000

10,400

BALANCE SHEET, YEAR-END

2018

Assets

Current Assets

40,000

Fixed assets

160,000

Total assets

200,000

Liabilities and shareholders' equity

Current Liabilities

10,000

Long-Term Debt

100,000

Equity

90,000

Total liabilities and shareholders' equity

200,000

Homework Answers

Answer #1

external financing needed in 2019 = (Total assets 2018/Sales 2018)*(change in sales) - (Total current liabilities 2018/Sales 2018)*(change in sales) - [(Profit margin 2018*Sales 2019*(1 - last year's dividend payout ratio)]

change in sales = Sales 2018*sales growth rate = $200,000*20% = $40,000‬

Profit margin 2018 = Net Income/Sales = $26,000/$200,000 = 0.13‬ or 13‬%

Sales 2019 = Sales 2018*(1+sales growth rate) = $200,000*(1+0.20) = $200,000*1.20 = $240,000‬

last year's dividend payout ratio = Dividend/Net income = $10,400/$26,000 = 0.4‬ or 40‬%

external financing needed in 2019 = ($200,000/$200,000)*($40,000) - ($10,000/$200,000)*($40,000) - [(0.13*$240,000*(1-0.40)]

external financing needed in 2019 = 1*$40,000 - 0.05‬*$40,000 - $31,200*0.60 = $40,000 - $2,000 - $18,720‬ = $19,280‬

external financing will the firm require in 2019 is $19,280.

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