Question

Question 2

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

Income Statement		Balance Sheet
Sales	$3,700	Current assets	$3,900	Current liabilities	$910
Costs	2,300	Fixed assets	5,800	Long-term debt	3,570
Taxable income	$1,400			Equity	5,220
Taxes (31%)	434	Total	$9,700	Total	$9,700
Net income	$966

Assets, costs, and current liabilities are proportional to sales. Long-term debt and equity are not. The company maintains a constant 60 percent dividend payout ratio. As with every other firm in its industry, next year's sales are projected to increase by exactly 30 percent.

Required:

What is the external financing needed? (Do not round your intermediate calculations.)

rev: 09_17_2012

$2,407.68

$2,084.68

$2,184.68

$1,071

$2,134.68

Question 3

The most recent financial statements for Live Co. are shown here:

Income Statement		Balance Sheet
Sales	$4,700	Current assets	$4,996	Debt	$9,988
Costs	3,102	Fixed assets	12,230	Equity	7,238
Taxable income	$1,598	Total	$17,226	Total	$17,226
Taxes (34%)	543
Net income	$1,055

Assets and costs are proportional to sales. Debt and equity are not. The company maintains a constant 38 percent dividend payout ratio. No external equity financing is possible.

Required:

What is the internal growth rate? (Do not round your intermediate calculations.)

rev: 09_17_2012

3.95%

4.05%

2.38%

3.85%

9.93%

Answer 1

1.

Sales(3700*1.3)	4810
Costs(2300*1.3)	2990
Taxable income	1820
Taxes@31%	564.2
Net income	$1255.80
Less:dividends(1255.8*60%)	753.48
Addition to retained earnings	$502.32

Since assets are proportional to sales;total assets would be=(9700*1.3)=$12610

Current liabilities would be=(910*1.3)=$1183

Hence total liabilities=Current liabilities+Long term liabilities

=(1183+3570)=$4753

Total equity would be=Equity+Addition to retained earnings

=(5220+502.32)=$5722.32

Total assets=Total liabilities+Total equity

Hence external financing needed=(12610-(4753+5722.32)

which is equal to

=$2134.68

2.

ROA=Net income/Total assets

=(1055/17226)=6.124463%

Retention ratio=1-dividend payout ratio

=(1-0.38)=0.62

Internal growth rate=(ROA*Retention ratio)/[1-(ROA*Retention ratio)]

(0.62*0.06124463)/[1- (0.62*0.06124463)]

which is equal to

=3.95%(Approx).