Question

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.)

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