Question

The 2017 financial statements for Growth Industries are presented below.

INCOME STATEMENT, 2017
Sales				$	370,000
Costs					235,000
EBIT				$	135,000
Interest expense					27,000
Taxable income				$	108,000
Taxes (at 35%)					37,800
Net income				$	70,200
Dividends	$	42,120
Addition to retained earnings		28,080

  

BALANCE SHEET, YEAR-END, 2017
Assets					Liabilities
Current assets					Current liabilities
Cash	$	6,000			Accounts payable	$	13,000
Accounts receivable		11,000			Total current liabilities	$	13,000
Inventories		33,000			Long-term debt		270,000
Total current assets	$	50,000			Stockholders’ equity
Net plant and equipment		310,000			Common stock plus additional paid-in capital		15,000
					Retained earnings		62,000
Total assets	$	360,000			Total liabilities and stockholders' equity	$	360,000

  

Sales and costs are projected to grow at 20% a year for at least the next 4 years. Both current assets and accounts payable are projected to rise in proportion to sales. The firm is currently operating at 75% capacity, so it plans to increase fixed assets in proportion to sales. Interest expense will equal 10% of long-term debt outstanding at the start of the year. The firm will maintain a dividend payout ratio of 0.60.

What is the required external financing over the next year

Answer 1

Sale in last year=	$              370,000
Projected sale increase in next year=	20%
Projected sale increase in next year=	370000*20%
Projected sale increase in next year=	$                74,000
Assets ratio on sales=	Total asset/Sale
Assets ratio on sales=	360000/370000
Assets ratio on sales=	97.30%
Increase in total assets=	74000*97.30%
Increase in total assets=	$                72,000
Liabilities ratio on sales=	Current liability/Sale
Liabilities ratio on sales=	13000/370000
Liabilities ratio on sales=	3.51%
Increase in total liabilities=	74000*3.51%
Increase in total assets=	$                  2,600
Projected income statement
	Last year	Ratio on sale	Projected for next year
Sales	$              370,000	100%	$ 444,000	Increase by 20%
Costs	$              235,000	64%	$ 282,000	Increase by 20%
EBIT	$              135,000	36%	$ 162,000
Interest expense	$                27,000		$   27,000
Taxable income	$              108,000		$ 135,000
Taxes (at 35%)	$                37,800		$   47,250
Net income	$                70,200		$   87,750
Dividend @ 60% of net income	$                42,120		$   52,650
Retained earnings	$                28,080		$   35,100
Increase in external financing=	Increase in net asset - increase in current liabilities - projected retained earnings
Increase in external financing=	72000-2600-35100
Increase in external financing=	$                34,300