Question

The most recent financial statements for Bradley, Inc., are shown here (assuming no income taxes):

Income Statement
Sales	$	6,400
Costs		(4,480	)
Net income	$	1,920

Balance Sheet
Assets	$	19,200		Debt	$	9,900
				Equity		9,300
Total	$	19,200		Total	$	19,200

  

Assets and costs are proportional to sales. Debt and equity are not. No dividends are paid. Next year’s sales are projected to be $7,808. What is the external financing needed? (A negative value should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to the nearest whole number.)

Answer 1

External financing needed = $1881.60

Explanation;

External financing needed = Increase in assets – Increase in retained earnings

As per information of the question projected sales will be $7808

Hence growth rate in sales ($7808 / $6400) = 22%

Projected Income Statement
Sales	$7808
Less: Costs ($4480 * 1.22)	($5465.60)
Net income	$2342.40
Less: Dividends	$0
Retained earnings	$2342.40

Increase in assets ($19200 * 0.22) = $4224

Hence, external financing needed = $4224 – $2342.40

= $1881.60