Question

For the next fiscal​ year, you forecast net income of $ 48,900 and ending assets of $ 504,700. Your​ firm's payout ratio is 9.5 %. Your beginning​ stockholders' equity is $ 299,600 and your beginning total liabilities are $ 119,100. Your​ non-debt liabilities such as accounts payable are forecasted to increase by $ 9,500. What is your net new financing needed for next​ year?

The Tax Cuts and Jobs Act of 2017 temporarily allows​ 100% bonus depreciation​ (effectively expensing capital​ expenditures). However, we will still include depreciation forecasting in this chapter and in these problems in anticipation of the return of standard depreciation practices during your career.

Answer 1

Solution :- Retained earnings = Net income * (1 - Pay out ratio).

= 48900 * (1 - 0.095) (Pay out ratio = 9.5 % i.e., 9.5 / 100 = 0.095)

= 48900 * 0.905

= $ 44254.50

Next year end Stockholder's equity balance = Beginning balance of equity + Retained earnings during the year.

= 299600 + 44254.50

= $ 343854.50

Next year end balance of liabilities = Beginning balance of liabilities + Additions to accounts payable in next year.

= 119100 + 9500

= $ 128600.

Net new financing required = Next year end asset balance - (Next year end Stockholder's equity balance + Next year end balance of liabilities)

= 504700 - (343854.50 + 128600)

= 504700 - 472454.50

= $ 32,245.50

Conclusion :- New financing net required in the next year = $ 32,245.50 (approx).