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In: Finance

Problem 4-4 EFN [LO2] The most recent financial statements for Cardinal, Inc., are shown here: Income...

Problem 4-4 EFN [LO2]

The most recent financial statements for Cardinal, Inc., are shown here:
Income Statement Balance Sheet
  Sales $ 31,000   Assets $ 73,200   Debt $ 36,700
  Costs 18,400   Equity 36,500
  Taxable income $ 12,600     Total $ 73,200     Total $ 73,200
  Taxes (22%) 2,772
    Net income $ 9,828

Assets and costs are proportional to sales. Debt and equity are not. A dividend of $3,700 was paid, and the company wishes to maintain a constant payout ratio. Next year’s sales are projected to be $35,340.

What is the external financing needed? (Do not round intermediate calculations.)

Solutions

Expert Solution

Next year's projected sales = $35,340

Current year sales = $31,000

% of increase in sales next year = (Next year sales - Current year sales / Current year sales

% of increase in sales next year = ($35,340 - $31,000) / $31,000

% of increase in sales next year = 0.14 or 14%

Projected income statement for next year :

Sales $35,340
Less : Cost ($18,400 + 14%) $20,976
Taxable income $14,364
Tax @ 22% ($14,364 * 22%) $3,160.08
Net income $11,203.92
Less : Dividend (Note 1) $4,218.28
Transfer to reserve $6,985.64

Note 1 : Calculation of dividend for next year

Current year dividend payout ratio is to be maintained for next year projection also.

Dividend payout ratio = Current year dividend / Net income

Dividend payout ratio = $3,700 / $9,828

Dividend payout ratio = 0.3765 or 37.65%

Now,

Next year projected dividend = Projected Net income * Dividend payout ratio

Next year projected dividend = $11,203.92 * 37.65%

Next year projected dividend = $4,218.28

Projected Balance Sheet

Assets Amount Liabilities & equity Amount
Assets ($73,200 + 14%) $83,448 Debt (no change) $36,700
Equity $36,500
Reserves (transfer from income statement) $6,985.64
Total $83,448 $80,185.64

External financing needed = Total projected assets - Total projected liabilities & equity

External financing needed = $83,448 - $80,185.64

External financing needed = $3,262.36

Note : In projected balancesheet, balance income after dividend payment transferred to reserve separately on balancesheet. In current year, it is assumed that balance income after dividend is considered in equity in balancesheet.

jeff jeffy answered 3 months ago
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