Question

The 2017 financial statements for Growth Industries are presented below.

Sales and costs are projected to grow at 30% a year for at least the next 4 years. Both current assets and accounts payable are projected to rise in proportion to sales. The firm is currently operating at 75% capacity, so it plans to increase fixed assets in proportion to sales. Interest expense will equal 10% of long-term debt outstanding at the start of the year. The firm will maintain a dividend payout ratio of 0.50.

What is the required external financing over the next year? (Enter excess cash as a negative number with a minus sign.)

INCOME STATEMENT, 2017
Sales				$	240,000
Costs					170,000
EBIT				$	70,000
Interest expense					14,000
Taxable income				$	56,000
Taxes (at 35%)					19,600
Net income				$	36,400
Dividends	$	18,200
Addition to retained earnings		18,200

  

BALANCE SHEET, YEAR-END, 2017
Assets					Liabilities
Current assets					Current liabilities
Cash	$	7,000			Accounts payable	$	14,000
Accounts receivable		12,000			Total current liabilities	$	14,000
Inventories		21,000			Long-term debt		140,000
Total current assets	$	40,000			Stockholders’ equity
Net plant and equipment		180,000			Common stock plus additional paid-in capital		15,000
					Retained earnings		51,000
Total assets	$	220,000			Total liabilities and stockholders' equity	$	220,000

Answer 1