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Eagle Sports Supply has the following financial statements. Assume that Eagle’s assets are proportional to its...

Eagle Sports Supply has the following financial statements. Assume that Eagle’s assets are proportional to its sales. INCOME STATEMENT, 2017 Sales $ 1,000 Costs 190 Interest 70 Taxes 140 Net income $ 600 BALANCE SHEET, YEAR-END 2016 2017 2016 2017 Assets $ 2,900 $ 3,200 Debt $ 1,100 $ 1,200 Equity 1,800 2,000 Total $ 2,900 $ 3,200 Total $ 2,900 $ 3,200

a. Find Eagle’s required external funds if it maintains a dividend payout ratio of 70% and plans a growth rate of 15% in 2018. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

b. If Eagle chooses not to issue new shares of stock, what variable must be the balancing item? Debt Interest Dividends Retained earnings

c. What will be the value of this balancing item? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

d. Now suppose that the firm plans instead to increase long-term debt only to $1,300 and does not wish to issue any new shares of stock. What is now the balancing item? (Do not round intermediate calculations. Round your answer to the nearest whole number.) Debt Interest Dividends Retained earnings

e. What will be the value of this new balancing item? Next Visit question mapQuestion 2 of 7 Total 2 of 7 Pr

Solutions

Expert Solution

a. In 2018, since the growth rate is expected to be 15%, the assets will become,

assets = 3200*1.15 = 3680. Hence, funding is required for $480 (3680-3200).

Income statment for 2017 and 2018 are given below.

2017 2018
Sales 1000 1150 1000*1.15
Costs 190 218.50 190*1.15
Operating profit 810 931.50 sales - costs
Interest 70 76.36 (70/1100)*1200
PBT 740 855.14 Op. profit - interest
Taxes 140 161.78 (140/740)*855.1
Net income 600 693.35 PBT - taxes

Retaiend earnings = ( 1 - Dividend payout ratio) * net income = (1-70%) * 693.35 = 208.01

external funds required = 480-208.01 = 271.99

b &c.  Debt must be the balancing item, and will increase by $271.99, to a total value of $1471.99.

d&e. With a restriction on increase in debt, the company will have to reduce dividend payments. Since debt can only be increased by $100, dividend payment will decease by the remaining $171.99

Dividend = (693.35 * 70%) - 171.99 = 313.36

jeff jeffy answered 1 year ago
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