Question

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.)

Answer 1

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