Question

Wish Inc. sells low-cost items online. Its most recent income statement and balance sheet are given below:

Income statement ($ million)			Balance sheet ($ million)
Sales	29		Current assets	14		Debt	28
Costs	23.2		Fixed assets	56		Equity	42
Net income	5.8		Total assets	70		Total	70

Sales, assets and costs are expected to grow by 10% the following year.

  Attempt 2/10 for 7 pts.

Part 1

If company expects to keep Debt-Equity ratio unchanged from year to year, based on your projected figures, what's the amount of dividend ($ million) that company is likely to pay out in the following year?

Answer 1

Sales grow at 10%=29*(1+10%)=$31.9 million

Costs grow at 10%=23.2*(1+10%)=$25.52 million

Net Income=$31.9-$25.52=$6.38 million

==> Assets will increase by 10%=70*(1+10%)=$77 million.

Out of this, Equity contribution to be =42/70=60%

Hence, Equity should be=60%*$77 million=$46.2 million

Equity increases by $4.2 million (46.2-42)

Dividends paid=Net Income-Increase in Equity=$6.38-$4.2=$2.18 million