Question

# the most recent financial statements for GPS, Inc., are shown here: Income Statement Sales \$21,685 Costs...

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?

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
S
1 = 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

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