Question

Consider the following simplified financial statements for the Fire Corporation (assuming no income taxes): Income Statement...

Consider the following simplified financial statements for the Fire Corporation (assuming no income taxes):

Income Statement

  Sales

$34,503

  Costs

$25,889

Balance Sheet

  Assets

$59,998

  Debt

$16,652

Equity

?

The company has predicted a sales increase of 8 percent. Assume Fire pays out half of net income in the form of a cash dividend. Costs and assets vary with sales, but debt and equity do not.

Determine the external financing needed.(round 2 decimal places)

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Answer #1

Total assets=Total liabilities+Total equity

Hence beginning equity=59,998-16,652

=$43346

Sales(34,503*1.08) 37263.24
Costs(25,889*1.08) 27960.12
Net income 9303.12
Less:Dividends(9303.12*50%) 4651.56
Addition to retained earnings 4651.56

Total assets would be=59,998*1.08

=$64797.84

Total equity would be=Beginning equity+Addition to retained earnings

=43346+4651.56=$47997.56

Total assets=Total liabilities+Total equity

Hence external financing needed=64797.84-47997.56-16,652

=$148.28

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