Question

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

Income Statement		Balance Sheet
Sales	$4,200	Assets	$15,400	Debt	$10,500
Costs	3,440			Equity	4,900
Net income	$760	Total	$15,400	Total	$15,400

Assets and costs are proportional to sales. Debt and equity are not. No dividends are paid. Next year's sales are projected to be $5,964. What is the external financing needed? (Do not round your intermediate calculations.)

HINT: Start by calculating the growth in assets. Now we need to figure out how we will pay for the growth. Start by subtracting off from that needed amount of new assets the estimated growth in internal equity (that it, the new retained earnings that current shareholders use to purchase some of those new assets). Whatever amount is left over is what we must raise in new, external financing. That financing may be in the form of new debt (new loans) or new equity (new shares of stock).

MULTIPLE CHOICE

• $5,259

• $5,514

• $5,669

  $5,139

• $5,389

Answer 1

Answer : Correct Option is $5,389

Explanation :

Calculation of Increse in sales

Increase in sales = (5964 - 4200) / 4200

= 0.42 or 42%

Now we need to prepare Income Statement and Balance sheet if No Dividends is paid and Assets and costs are proportional to sales.

Income Statement ( After Growth)

	Working	Amount
Sales		5,964
Costs	[3440 + (42% * 3440)	(4884.8)
Net Icome		1079.2

Balance Sheet (After Growth)

	Working	Amount		Working	Amount
Assets	15400 + (15400 * 42%)	21868	Debt		10500
			Equity	4900 + 1079.2	5979.2
	Total Assets	21868	Total Debt & Equity		16479.2

External Financing Needed = Total Assets - Total of Debt & Equity

= 21868 - 16479.2

= $5388.8 or 5389

Note : As no dividend is paid the amount of Net income will be added to equity.