Question

Johnson & Johnson would like to grow by 16% next year.  Assets and costs are expected to grow proportionate to sales, but debt and equity will not.  The dividend payout ratio will remain the same as the current year.  The following information has been collected.  What is external financing needed?

Sales                100,000

Costs                 70,000

Dividends            9,000

Assets              350,000

Debt                200,000

Equity              150,000

Tax rate           21%

Answer 1

EFN is given by the equation:
EFN = (A/S) x (Δ Sales) - (L/S) x (Δ Sales) - (PM x FS x (1-d))
where,
A / S = Assets that change givendirectly with sales.
Δ sales = Change in sales
L / S = Liabilities that change directly with sales
PM = Profit Margin on Sales = net income / sales.
FS = Forecasted Sales
d = dividend payout ratio
(1 - d) = retention ratio
Substituting required values in the above equation we have,
EFN = (350000/100000)*100000*16%-0*-100000*116%*23.7%*(1-37.97%) =	$          38,947
WORINGS:
Profit margin = (100000-70000)*(1-21%)/100000 =	23.70%
Dividend payout = 9000/23700 =	37.97%