Question

Below are the 2019 income statement and balance sheet of Happy water, Inc. Assuming the company's fixed assets are operating at 100% capacity and the company expect 20% growth in sales in 2020. If the tax rate and payout ratio in 2020 are the same as those in 2019, what is the external financing needs in 2020?

Income Statement 2019
Sales	150
Costs	100
EBIT	50
Interest exp.	10
EBT	40
Tax	8
NI	32
Dividends	16
RE	16

Balance Sheet 12/31/2019
Assets			Liabilities
Cash	15		Acct Pay	20
Acct Recv	30		Notes Pay	40
Inventory	70
Current Assets	115		LT Debt	150
			Total Liabilities	210
Fixed Assets	190		Common Stock	50
			RE	45
			Total Equity	95
Total Assets	305		Total Liabilities & Equity	305

Answer 1

EFN = (Total assets of previous year)*(% increase in Sales) - (Spontaneous Liabilities of previous year)*(% increase in Sales) - [Forecasted sales*Net Profit Margin*(1-Dividend Payout ratio)]

- Forecasted sales = $150(1+0.20) = $180

- Net profit margin = Net Income/Sales = 32/150 = 21.33%

Note- Since, tax rate is same as previous year, thus its effect on Net profit margin won't change from previous from this year

- Dividend payout ratio = Dividend/Net Income = $16/$32 = 50%

EFN = (305)(20%) - (20)(20%) - (180)(21.33%)(1-0.50)

EFN = $ 61- $ 4 - $19.2

EFN = $37.8

So, the external financing needs in 2020 is $ 37.8

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answered by: anonymous