Question

For the next fiscal​ year, you forecast net income of $51,200 and ending assets of $504,400....

For the next fiscal​ year, you forecast net income of $51,200 and ending assets of $504,400. Your​ firm's payout ratio is 9.7%. Your beginning​ stockholders' equity is $295,600 and your beginning total liabilities are $119,100. Your​ non-debt liabilities such as accounts payable are forecasted to increase by $9,600. Assume your beginning debt is $106,600. What amount of equity and what amount of debt would you need to issue to cover the net new financing in order to keep your​ debt-equity ratio​ constant?

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Answer #1

Answer -

Increased in equity = Net income * Payout ratio ($51200 * (1-9.7%)) = $46233.60

Increased in share holder's equity per share/ Dividend per share = Stockholders equity * Payout ratio ($295600 * 9.7%) = $28673.20

Total Liability = Beginning liability + Non debt liability + Debt ($119100 + $9600 + $106600) = $235300

Total Capital = Increased in equity + Dividend + Net Income + Sockholder equity ($46233.60 + $28673.20 + $51200 + $295600) = $421706.80

Total capital + Total liability ($235300 + $421706.80) = $657006.80 (Round off) = $657007

Debt/equity need to issue to cover new financing = Liability - Asset ($657007 - $504400) = $152607.

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