Question

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

INCOME STATEMENT BALANCE SHEET

Sales $ 47,000                         Assets $ 107,700           Debt $ 30,000

Costs 37,900 Equity 77,700

Taxable income $ 9,100 Total $ 107,700 Total $ 107,700

Taxes (22%) 2,002

Net income $ 7,098

Assets and costs are proportional to sales; debt and equity are not. A dividend of $2,400 was paid, and the company wishes to maintain a constant payout ratio. Next year’s sales are projected to be $54,520. What is the external financing needed? (Do not round intermediate calculations and enter your answer to the nearest whole number, e.g., 32.)

Answer 1

Growth rate in sales=(54,520-47000)/47000

=16%

Dividend payout ratio=Dividend payout/Net income

=2400/7,098

=0.338123415

Sales	54,520
Costs(37,900*1.16)	43964
Taxable income	10556
Taxes(10556*22%)	2322.32
Net income	8233.68
Less:Dividends(8233.68*0.338123415)	2784
Addition to retained earnings	5449.68

Total assets would be=107,700*1.16=$124932

Total equity would be=77,700+Addition to retained earnings

=77,700+5449.68=$83149.68

Total assets=Total liabilities+Total equity

Hence external financing needed=124932-(83149.68+30,000)

=$11782(Approx)