Question

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

Income Statement			Balance Sheet
Sales	$	27,300	Assets	$	117,000	Debt	$	25,900
Costs		16,100				Equity		91,100
Taxable income	$	11,200	Total	$	117,000	Total	$	117,000
Taxes (36%)		4,032
Net income	$	7,168

Assets and costs are proportional to sales. Debt and equity are not. A dividend of $1,841.4 was paid, and Martin wishes to maintain a constant payout ratio. Next year’s sales are projected to be $37,674. What external financing is needed? (Do not include the dollar sign ($). Round your answer to to 2 decimal places. (e.g., 32.16))

Answer 1

proportionate increase in sales = (new sales - previous sales) / previous sales
=37674 - 27300) / 27300
=38%

As asset and cost are proportionate to sales hence our new Asset and cost will be

Cost = 16100 * 1.38 = 22218
Asset =111700*1.38 = 154146

		previous year	next year
	sales	27300	37674
less	cost	16100	22218
	Taxable Income	11200	15456
less	Tax	4032	5564.16
	Net Income	7168	9891.84
	Dividend	1841.4	2541.13	(N.I * payout ratio
	payout ratio	0.25689	(Dividend /Net Income)
	Retained earnings		7350.71
			(net income - dividend)

New Equity = previous Equity + Retained earning
91100+7350.71
=98450.71

Debt = 25900

Asset = 154146

Financing needed = Asset - Total debt and equity
= 154146 - (98450.71+25900)
=29795.29