Question

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

Income Statement				Balance Sheet
Sales	$	11,100		Current assets	$	5,400		Current liabilities	$	3,300
Costs		7,900		Fixed assets		10,200		Long-term debt		4,820
Taxable income	$	3,200						Equity		7,480
Taxes (24%)		768		Total	$	15,600		Total	$	15,600
Net income	$	2,432

Assets, costs, and current liabilities are proportional to sales. Long-term debt and equity are not. The company maintains a constant 40 percent dividend payout ratio. As with every other firm in its industry, next year’s sales are projected to increase by exactly 17 percent.

What is the external financing needed? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

Answer:

External Fund Needed = Projected Increase in Assets – Spontaneous Increase in Liabilities – Addition to Retained Earnings

Projected Increase in Assets = Assets * Sales Growth Rate
Projected Increase in Assets = $15,600 * 17% = $2,652

Spontaneous Increase in Liabilities = Liabilities * Sales Growth Rate
Spontaneous Increase in Liabilities = $3,300 * 17% = $561

Increase in Retained Earning = Expected Sales * Profit Margin * Retention Rate
Profit Margin Rate = Net Income / Sales * 100
Profit Margin Rate = $2,432 / $11,100 * 100
Profit Margin Rate = 21.91%

Retention Rate = 1 - Dividend Payout Ratio
Retention Rate = 1 - 0.40 = 0.60 or 60%

Expected Sales = $11,100 * 1.17 = $12,987
Addition to Retained Earning = $12,987 * 21.91% * 60%
Addition to Retained Earning = $1,707.27

External Fund Needed = $2,652 - $561 - $1,707.27
External Fund Needed = $383.73