Question

KBC, Inc. has the financial profile illustrated below.

Income statement:

Sales: 222,300

Costs: 133,000

Taxable income: 89,300

Taxes (34%): 30,362

Net income: 58,938

Tax rate: 34%

Dividend paid: 15,500

Balance Sheet:

Assets: 510,600

Debt: 100,500

Equitity: 410,100

Total: 510,600

Next year, Margins (%) will hold steady, and Assets grow proportionally with Sales. Debt will remain unchanged. ABC intends to maintain the same constant dividend payout ratio (dividend as a percent of Net Income) as this year. Next year’s sales are projected to increase by 11%. How much additional external capital will be required to support the growth in assets, given that KBC, Inc. retains some of its earnings and pays the balance in dividends?

A. $7,950

B. $17,293

C. $34,808

D. $56,166

E. $66,378

Answer 1

Given

Net Profit = $ 58938

Dividend Paid = $ 15500

Retention Ratio = ( Net income - Dividend) / Net income

= ( $ 58938-$ 15500)/ $ 58938

= $ 43438/$ 58938

= 0.737012

When Assets increases with sales then EFN is

EFN =  -rps+g( A-rps)

Here EFN = External Financing needed

r = Retention Ratio

p = Profit Margin i.e Net Profit / sales

s = Sales

g = Growth rate

A= Assets

EFN = -rps+g( A-rps)

   =- ( 0.737012) ( $ 58938/$ 222300)($222300) +0.11[($ 510600- { ( ( 0.737012) ( $ 58938/$ 222300)($222300)}]

= -$ 43438.016+0.11[ $ 510600-$ 43438.016]

= -$ 43438.016+ 0.11( $ 467162)

= -$ 43438.016+$ 51387.82

= $ 7950

Hence External Financing needed is $ 7950. So option A is the Correct answer.

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