Question

Edwards Industries’ sales are expected to increase from $5 million in 2016 to $6 million in 2017, and its assets totaled $3 million at the end of 2016. Also, at year-end 2016, current liabilities were $800,000, consisting of $200,000 of notes payable, $200,000 of accounts payable, and $400,000 of accrued liabilities. Looking ahead to 2017, the company estimates that its assets must increase by $0.60 for every $1.00 increase in sales. Paladin’s retention ratio is 40%. If the firm does not need to raise funds externally, what is the projected net income for 2017? (8 points)

L₀=AnswerMillion

payout ratio=Answer

Net income=AnswerMillion

Answer 1

Formula for External funds Needed:-

EFN = (Assets/Sales)*Change in sales - (Spontaneous Liab/Sales)*Change in sales - [Net Income*retention ratio]

Since, firm does not need External funds, EFN will be 0.

where, Change in Sales = $6M - $5M = $ 1 million

Spontaneous Liab = Accounts Payable + Accured Liabilities (notes Payable are not part of Spontaneous Liab)

= $ 200,000 + $ 400,000 = $600,000

0 = [(3M/5M)*1M] - [(600,000/5,000,000)*1000,000] - [Net Income*0.40]

0 = 600,000 - 120,000 - 0.40 NI

0.40 Net Income = 480,000

Net Income = 1,200,000

- So, net Income = 1.2 million

- L0 = Spontaneous Liabilities = 0.6 Million

- Dividend Payout ratio = 1- Retention ratio = 1 - 0.40

= 0.60 or 60%

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