Question

the most recent financial statements for GPS, Inc., are shown here:

Income Statement
Sales	$21,685
Costs	$11,856
Taxable Income	?
Taxes (40%)	?
Net Income	?

Balance Sheet
Assets	$50,126	Debt	$16,779
		Equity	?

Assets and costs are proportional to sales. Debt and equity are not. A dividend of $1,548 was paid, and the company wishes to maintain a constant payout ratio. Next year’s sales are projected to be $26,703.

What is the external financing needed?

Answer 1

Taxable Income = Sales - Costs = $21,685 - $11,856 = $9,829

Net Income = Taxable Income - Taxes

= $9,829 - ($9,829 * 0.40) = $9,829 - $3,931.60 = $5,897.40

Equity = Assets - Debt = $50,126 - $16,779 = $33,347

g = [S1/S0] - 1 = [$26,703/$21,685] - 1 = 1.2314 - 1 = 0.2314, or 23.14%

Additional Funds Needed = [A0 x (ΔS / S0)] - [L0 x (ΔS / S0)] - [S1 x PM x b]

Where,
A_o = current level of assets
L_o = current level of liabilities
ΔS/S_o = percentage increase in sales i.e. change in sales divided by current sales
S₁ = new level of sales
PM = profit margin = net income / sales = $5,897.40 / $21,685 = 0.2720
b = retention rate = 1 - payout rate = 1 - (Dividends Paid/Net Income)

= 1 - ($1,548 / $5,897.40) = 1 - 0.2625 = 0.7375

AFN = [$50,126 x 0.2314] - [$0 x 0.2314] - [$26,703 x 0.2720 x 0.7375]

= $11,599.37 - $0 - $5,355.87 = $6,243.50