Question

Green Lumber has - Total sales of $387,200, - Total assets of $429,600, - Current liabilities of $45,000, - Dividends paid of $24,000, - Net income of $57,700.

Assume that all costs, assets, and current liabilities change spontaneously with sales. The tax rate and dividend payout ratios remain constant. Assume the firm is currently operating at full capacity.

If the firm's managers project a firm growth rate of 12 percent for next year, what will be the amount of external financing needed to support this level of growth?

Answer 1

Answer:

Projected Increase in Assets = Assets * Sales Growth Rate
Projected Increase in Assets = $429,600 * 12%
Projected Increase in Assets = $51,552

Spontaneous Increase in Current Liabilities = Current Liabilities * Sales Growth Rate
Spontaneous Increase in Current Liabilities = $45,000 * 12%
Spontaneous Increase in Current Liabilities = $5,400

Profit Margin Rate = Net Income / Sales * 100
Profit Margin Rate = $57,700 / $387,200 * 100 = 14.90%

Dividend Payout Ratio = Dividend / Net Income * 100
Dividend Payout Ratio = $24,000 / $57,700 * 100 = 41.59%

Retention Rate = 1 - Dividend Payout Ratio
Retention Rate = 1 - 0.4159 = 0.5841 or 58.41%

Expected Sales = $387,200 * 12% = $46,464

Increase in Retained Earning = Expected Sales * Profit Margin * Retention Rate
Increase in Retained Earning = $46,464 * 14.90% * 58.41%
Increase in Retained Earning = $4,043.80

External Fund Needed = Projected Increase in Assets – Spontaneous Increase in Liabilities – Increase in Retained Earnings
External Fund Needed = $51,552 - $5,400 - $4,043.80
External Fund Needed = $42,108.20