Question

The most recent financial statements for Martin, Inc., are shown here: Income Statement Sales $28,000 Costs −16,800 Taxable income $11,200 Taxes (21%) −2,352 Net income $8,848 Balance Sheet Assets $114,800 Debt $60,000 Equity 54,800 Total $114,800 Total $114,800 Assets and costs are proportional to sales. Debt and equity are not. A dividend of $895 was paid, and Martin wishes to maintain a constant payout ratio. Next year’s sales are projected to be $33,040. What is the external financing needed? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Answer 1

Formula for External funds Needed(EFN):-

EFN = (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, Forecasted sales = $33,040

Last Year's Sales= $28,000

Change in Sales = $33,040 - $28,000 = $5,040

Last year's Total Assets = $114,800

Spontaneous Liab =0

After-Tax Profit Margin = Net Income/Sales = $8848/$28,000 = 31.6%

Dividend Payout Ratio = Dividend/net income = $895$8848 = 10.115280%

EFN = ($114,800/$28,000)*$5040 - ($0$28,000)*$5040 - [$33,040*31.6%*(1-0.10115280)]

EFN = $20,664 - $0- $9384.54

EFN = $11,279.46

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