Question

. 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

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.