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In: Finance

Model Corp.'s most recent balance sheet and income statement are given below (all numbers in $...

Model Corp.'s most recent balance sheet and income statement are given below (all numbers in $ million): Assets Liabilities and Equity Cash 38 Accounts payable 114 Accounts receivable 76 Current liabilities 114 Inventory 114 Long-term debt 152 Current assets 228 Total liabilities 266 Machinary 152 Equity 114 Total assets 380 Total liab. & equity 380 Income statement Sales 110 Costs 66 Depreciation 22 EBIT 22 Interest 7.6 Taxable income 14.4 Taxes 4.896 Net income 9.5 Sales, assets and costs (including depreciation) are expected to grow by 40% next year, while the tax rate and long-term debt will stay constant. The company pays out 60% of net income as dividends.

Part a) Using the percentage of sales method, what will be the net income next year (in $ million)?

Part b) Using the percentage of sales method, what should be the book value of equity by end of next year as a result of net income and dividend payout before any EFN is funded (in $ million)?

Part c) What is the external financing needed (EFN) for next year (in $ million)?

Solutions

Expert Solution

Answer:

As per the given details for Model Corp, we have all the figures available for current year Balance Sheet and Income statement.

To get the next year figures , there are certain conditions given as

1. Sales, assets and costs (including depreciation) will grow by 40%

2. Tax rate and long-term debt will be same that means the tax rate will be calculated like below

Tax Rate = Total taxes for current year / Taxable Income = 4.896 / 14.4 = 34%

Also, as the long-term debt will be same for next year so, the interest will also be same in the next year

3. 60% of the net income will be paid as dividend so, the income available for equity will be 40% of Net income

Part a

Using the percentage of sales method, the net income for next year will be $15.31 million before payment of dividend and $6.12 million after payment of dividend (see below calculation)

Part b

Using the percentage of sales method, the book value of equity by end of next year as a result of net income and dividend payout before any EFN is funded will be $120.12 million

Value of equity = Equity of previous year plus net income available for retained earning after dividend payout

= 114 + 6.12 (see Income statement) = $120.12 million

Part c

External financing needed (EFN) for next year = Total Assets - Total liabilities and equity before EFN

So, EFN = 532 - 431.72 = $100.28 million

jeff jeffy answered 2 years ago
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