Question

The most recent financial statements for GPS, Inc., are shown here:

Income Statement
Sales	$22,640
Costs	$10,389
Taxable Income	?
Taxes (40%)	?
Net Income	?

Balance Sheet
Assets	$59,616	Debt	$15,043
		Equity	?

Assets and costs are proportional to sales. Debt and equity are not. A dividend of $1,649 was paid, and the company wishes to maintain a constant payout ratio. Next year’s sales are projected to be $26,534.

What is the external financing needed?

Answer 1

i) Recent financial statement :

Income statement :

Sales	$22,640
Less : Cost	($10,389)
Taxable income	$12,251
Less : Tax @ 40% ($12,251 * 40%)	($4,900.40)
Net income	$7,350.60
Less : Dividend	($1,649)
Transfer to reserve (included in equity)	$5,701.60

Balance sheet

Assets	$59,616	Debt	$15,043
		Equity (Balance)	$44,573
Total	$59,616	Total	$59,616

ii) Projected financial statement :

a) Sales increase rate = (New sales - Last sales)/ Last sales

Sales increase rate = ($26,534 - $22,640)/$22,640

Sales increase rate = $3,894 / $22,640 = 0.1720 or 17.20%

b) Dividend payout ratio = Last dividend / Last net income

Dividend payout ratio = $1,649 / $7,350.60

Dividend payout ratio = 0.2243 or 22.43%

Dividend payout ratio remains constant in projected year.

Projected income statement :

Sales	$26,534
Less : Cost ($10,389 + 17.20%)	($12,175.91)
Taxable income	$14,358.09
Less : Tax ($14,358.09 * 40%)	($5,743.24)
Net income	$8,614.85
Less : Dividend @ 22.43% ($8,614.85 * 22.43%)	($1,932.31)
Transfer to reserve	$6,682.54

Projected balance sheet :

Assets ($59,616 + 17.20%)	$69,869.95	Debt(same)	$15,043
		Equity (same)	$44,573
		Reserve (transferred from net income)	$6,682.54
Total	$69,869.95	Total	$66,298.54

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

External financing needed = $69,869.95 - $66,298.54

External financing needed = $3,571.41