Question

recently, a firm paid 370 in dividends and does not plan to change its dividend payout...

recently, a firm paid 370 in dividends and does not plan to change its dividend payout ratio. currently, sales, net income, total assets, and total debt are 10700, 1050, 8590, and 4660, respectively. debt and equity do not change as sales change, but assets and costs for the firm do. how much external financing will be needed if the firm believes next year's sales will equal 11584?

A) -382 B) -28 C) 32 D) -32 E) 28

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Answer #1

Formula for External funds Needed(AFN):-

AFN = (Last year's Total Assets/Last Year's Sales)*Change in sales - (Last Year's Spontaneous Liab/Last Year's Sales)*Change in sales - [Forecasted sales*After-Tax Profit Margin*(1-Payout Ratio]

where, Last Year's Sales= $10700

Forecasted sales = $11584

Change in Sales = $11584 - $10,700 = $884

Last year's Total Assets = $8590

Spontaneous Liab = 0

After-Tax Profit Margin =Net Income/Sales = $1050/$10700 = 9.813084%

Payout Ratio = Dividends/Net Income = $370/$1050 = 35.2381%

AFN = (8590/10700)*884 - (0/10700)*884 - [11584*9.813084%*(1-35.2381%)]

AFN = $709.68- $0 - $736.18

AFN = -$26.5

Option B. (difference due decimal rounding off)

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