Question

Consider the following simplified financial statements for the Fire Corporation (assuming no income taxes):

Income Statement
Sales	$32922
Costs	$25264

Balance Sheet
Assets	$50034	Debt	$15500
		Equity	?

The company has predicted a sales increase of 7 percent. Assume Fire pays out half of 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

Before increase in the sales

Net Income Before Increase in sales = Sales – Cost of goods sold

= $32,922 – 25,264

= $7,658

Total Assets = $50,034

Debt = $15,500

Equity = Total Assets – Debt = $50,034 – 15,500 = $ 34,534

After Increase in 7% Sales

Net Income will also increase to the extent of 7% in case of 7% increase in sales

= $7,658 x 107%

= $ 8,194.06

Payment of cash dividend = $8,194.06 x 0.50 = $4,097.03

The Addition to Retained Earnings = $8,194.06 – 4,097.03 = $4,097.03

Total Asset = $50,034 x 107% = $ 53,536.38

Total Debt & Equity = $15,500 + ($34,534 + 4,097.03) = $54,131.03

Therefore, the External Financing Needed = Total Assets – Total Debt & Equity

= $ 53,536.38 - 54,131.03

= -$594.65 (Negative)

“Hence, the External Financing Needed = -$594.65 (Negative)“