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 \$33,267 Costs \$27,751
 Balance Sheet Assets \$51,996 Debt \$15,221 Equity ?

The company has predicted a sales increase of 6 percent. Assume Fire pays out half of the 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. (Negative amount should be indicated by a minus sign.)

(Omit the "\$" sign and commas in your response. Enter your answer rounded to 2 decimal places. For example, \$1,200.456 should be entered as 1200.46.)

This Year:

Sales = \$33,267
Costs = \$27,751
Payout Ratio = 50%
Assets = \$51,996

Retention Ratio = 1 - Payout Ratio
Retention Ratio = 1 - 0.50
Retention Ratio = 0.50

Next Year:

Growth Rate = 6%

Sales = \$33,267 + \$33,267 * 6%
Sales = \$35,263.02

Costs = \$27,751 + \$27,751 * 6%
Costs = \$29,416.06

Net Income = Sales - Cost
Net Income = \$35,263.02 - \$29,416.06
Net Income = \$5,846.96

Addition to Retained Earnings = Net Income * Retention Ratio
Addition to Retained Earnings = \$5,846.96 * 0.50
Addition to Retained Earnings = \$2,923.48

Increase in Assets = \$51,996 * 6%
Increase in Assets = \$3,119.76

External Financing Needed = Increase in Assets - Addition to Retained Earnings
External Financing Needed = \$3,119.76 - \$2,923.48
External Financing Needed = \$196.28

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