Question

The most recent financial statements for Fleury Inc., follow. Sales for 2015 are projected to grow by 25 percent. Interest expense will remain constant; the tax rate and the dividend payout rate will also remain constant. Costs, other expenses, current assets, fixed assets and accounts payable increase spontaneously with sales.

FLEURY, INC. 2014 Income Statement
Sales				$	750,000
Costs					585,000
Other expenses					21,000
Earnings before interest and taxes				$	144,000
Interest paid					17,000
Taxable income				$	127,000
Taxes (20%)					25,400
Net income				$	101,600
Dividends	$	20,320
Addition to retained earnings		81,280

FLEURY, INC. Balance Sheet as of December 31, 2014
Assets				Liabilities and Owners’ Equity
Current assets				Current liabilities
Cash	$	20,940		Accounts payable	$	55,100
Accounts receivable		33,260		Notes payable		14,300
Inventory		70,220		Total	$	69,400
Total	$	124,420		Long-term debt	$	133,000
Fixed assets				Owners’ equity
Net plant and equipment	$	360,000		Common stock and paid-in surplus	$	119,000
				Retained earnings		163,020
				Total	$	282,020
Total assets	$	484,420		Total liabilities and owners’ equity	$	484,420

If the firm is operating at full capacity and no new debt or equity is issued, what external financing is needed to support the 25 percent growth rate in sales?

Answer 1

External financing needed = A₀/S₀*(S₁ - S₀) - L₀/S₀*(S₁ - S₀) - PM*(S₁)* (b)

A₀ = Assets in previous year varying directly with sales

S₀ = Sales in previous year

S₁ = Forcasted sales

L₀ = Liabilities in previous year varying directly with sales

PM = Profit margin

b = Retention ratio

Forecasted sales = 750,000 * (1 + 25%) = 937,500

External financing needed = (484,420/750,000) * (937,500-750,000) - (55,100/750,000) * (937,500-750,000) - (101,600/750,000) * 937,500 * (81,280/101,600)

External financing needed = 121,105 - 13,775 - 101,600 = 5,730