Question

Red Hat has total assets of $620,000, long-term debt of $236,000, stockholders' equity of $185,000, and...

Red Hat has total assets of $620,000, long-term debt of $236,000, stockholders' equity of $185,000, and current liabilities of $199,000. The dividend payout ratio is 34 percent and the profit margin is 9 percent. Assume all assets and current liabilities change spontaneously with sales and the firm is currently operating at full capacity. What is the external financing need if the current sales of $840,000 are projected to increase by 15 percent?

$5,612.30

$5,769.60

$5,835.90

$5,904.20

$6,011.50
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Homework Answers

Answer #1

External Financing Needed (EFN)

Expected Next Year Sales

Expected Next Year Sales = Current Year Sales x (1 + Sales growth rate)

= $840,000 x (1 + 0.15)

= $840,000 x 1.15

= $966,000

After Tax profit Margin

After Tax profit Margin = Expected Next Year Sales x Profit Margin

= $966,000 x 9.00%

= $86,940

Dividend Payout

Dividend Payout = After Tax profit Margin x Dividend payout Ratio

= $86,940 x 34%

= $29,559.60

Additions to Retained Earnings

Additions to Retained Earnings = After Tax profit Margin - Dividend Payout

= $86,940 - $29,559.60

= $57,380.40

Increase in Total Assets

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

= $620,000 x 15%

= $93,000

Increase in Spontaneous liabilities

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

= $199,000 x 15%

= $29,850

External Financing Needed (EFN)

Therefore, the External Financing Needed (EFN) = Increase in Total Assets - Increase in Spontaneous liabilities - Additions to retained earnings

= $93,000 - $29,850 - $57,380.40

= $5,769.60

“Hence, the External Financing Needed (EFN) will be $5,769.60”

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