Question

The most recent financial statements for Scott, Inc., appear below. Sales for 2020 are projected to...

The most recent financial statements for Scott, Inc., appear below. Sales for 2020 are projected to grow by 20 percent. Interest expense will remain constant; the tax rate and the dividend payout rate also will remain constant. Costs, other expenses, current assets, fixed assets, and accounts payable increase spontaneously with sales.

SCOTT, INC.
2019 Income Statement
  Sales $ 759,000
  Costs 594,000
  Other expenses 30,000
  Earnings before interest and taxes $ 135,000
  Interest expense 26,000
  Taxable income $ 109,000
  Taxes (21%) 22,890
  Net income $ 86,110
  Dividends $ 26,694
  Addition to retained earnings 59,416
SCOTT, INC.
Balance Sheet as of December 31, 2019
Assets Liabilities and Owners’ Equity
  Current assets   Current liabilities
    Cash $ 21,840     Accounts payable $ 56,000
    Accounts receivable 44,780     Notes payable 15,200
    Inventory 103,960       Total $ 71,200
      Total $ 170,580   Long-term debt $ 142,000
  Fixed assets   Owners’ equity
    Net plant and equipment $ 435,000     Common stock and paid-in surplus $ 120,500
    Retained earnings 271,880
      Total $ 392,380
  Total assets $ 605,580   Total liabilities and owners’ equity $ 605,580

If the firm is operating at full capacity and no new debt or equity is issued, what external financing is needed to support the 20 percent growth rate in sales? (Do not round intermediate calculations.)

Homework Answers

Answer #1

AFN = ((current level of assets - current level of spontaneous liabilities) * % increase in sales) - (next year sales * net profit margin * retention ratio)

spontaneous liabilities = accounts payable = $56,000

next year sales = current year sales * (1 + % increase in sales) = $759,000 * (1 + 20%) = $910,800

net profit margin = net income / sales = $86,110 / $759,000 = 11.35%

retention ratio = 1 - (dividend / net income) = 1 - ($26,694 / $86,110) = 69%

AFN = (($605,580 - $56,000) * 20%) - ($910,800 * 11.35% * 69%)

AFN = $38,616.80

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