Question

Assume the following facts about a firm: Sales(this year) were $100,000, net income(this year) was $10,000, assets(this year) were $50,000, current liabilities(this year) were $2,000, Anticipated growth rate is 12%. The proposed dividend payout ratio is 60%. The firm's external funding requirement for next year is? (Hint: You don't have to remember the EFR formula. Just realize that the funding requirement is the growth in assets less that in current liabilities less next year's retained earnings.)

a. $1,280

b. ($960)

c. $1,760

d. $800

Answer 1

External funding requirement for next year

Dividend Pay-out

Dividend Pay-out = Net Income x Dividend Pay-out Ratio

= $10,000 x 60%

= $6,000

Additions to Retained Earnings

Additions to Retained Earnings = Net Income - Dividend Pay-out

= $10,000 - $6,000

= $4,000

Increase in Total Assets

Increase in Total Assets = Total Assets x Percentage of Increase in sales

= $50,000 x 12%

= $6,000

Increase in Spontaneous liabilities

Increase in Spontaneous liabilities = Current Liabilities x Percentage of Increase in sales

= $2,000 x 12%

= $240

External Fund Needed

Therefore, the External Fund Needed = Increase in Total Assets – Increase in in Spontaneous liabilities – Additions to retained earnings

= $6,000 - $240 - $4,000

= $1,760

“Therefore, the firm's external funding requirement for next year is (C). $1,760”