Question

The most recent financial statements for Assouad, Inc., are shown here:

Income Statement				Balance Sheet
Sales	$	9,100		Current assets	$	3,900		Current liabilities	$	2,550
Costs		6,400		Fixed assets		9,200		Long-term debt		4,120
Taxable income	$	2,700						Equity		6,430
Taxes (24%)		648		Total	$	13,100		Total	$	13,100
Net income	$	2,052

Assets, costs, and current liabilities are proportional to sales. Long-term debt and equity are not. The company maintains a constant 45 percent dividend payout ratio. As with every other firm in its industry, next year’s sales are projected to increase by exactly 16 percent.

What is the external financing needed? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

External financing needed = $378.82

Explanation;

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

Projected Income Statement
Sales ($9100 * 1.16)	$10556
Costs ($6400 * 1.16)	$7424
Taxable income	$3132
Taxes	$751.68
Net income	$2380.32
Dividends ($2380.32 *0.45)	$1071.14
Retained earnings	$1309.18

Increase in assets ($13100 * 0.16) = $2096

Increase in current liabilities ($2550 * 0.16) = $408

Hence, external financing needed = $2096 – $408 – $1309.18

= $378.82