Question

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

Income Statement
Sales	$23,120
Costs	$11,132
Taxable Income	?
Taxes (40%)	?
Net Income	?

Balance Sheet
Assets	$56,917	Debt	$21,193
		Equity	?

Assets and costs are proportional to sales. Debt and equity are not. A dividend of $1,748 was paid, and the company wishes to maintain a constant payout ratio. Next year’s sales are projected to be $27,881.

What is the external financing needed? (Negative amount should be indicated by a minus sign.)

(Omit the "$" sign and commas in your response. Enter your answer rounded to 2 decimal places. For example, $1,200.456 should be entered as 1200.46.)

Answer 1

Sol:

Current year income statement and balance sheet

Income statement		Balance sheet
Sales	23120		Assets	56917	Debt	21193
Costs	11132				Equity	35724
Taxable income	11988		Total	56917		56917
Taxes (40%)	4795.20
Net income	7192.80

Next year’s sales are projected to be 27881,

Increase in sales = (Next year sales - Current year sales) / Current year sales

Increase in sales = (27881 - 23120) / 23120

Increase in sales = (27881 - 23120) / 23120

Increase in sales = 0.2059 or 20.59%

Assets and costs are proportional to sales.

Pro forma income statement		Pro forma Balance sheet
Sales	27881.00		Assets	68636.21	Debt	21193.00
Costs	13424.08				Equity	42290.15
Taxable income	14456.92				EFN	5153.06
Taxes (40%)	5782.77		Total	68636.21		68636.21
Net income	8674.15

The payout ratio is constant through last year, so dividend paid this year will be in proportion to payout ratio of last year.

Dividends = (1748 / 7192.80) x 8674.15 = 2108

Addition to retained earnings = Net income - Dividends

Addition to retained earnings = 8674.15 - 2108 = 6566.15

Now new equity balance = 35724 + 6566.15 = 42290.15

External financing needed (EFN) = Total assets - Total liabilities and equity

External financing needed (EFN) = 68636.21 - 63483.15 = 5153.06

Therefore external financing needed by the firm will be 5153.06

Workings