Question

Here are the abbreviated financial statements for Planner’s Peanuts:

INCOME STATEMENT, 2019
Sales	$	3,500
Cost		2,700
Net income	$	800

BALANCE SHEET, YEAR-END
		2018				2019						2018				2019
Assets		$	4,500			$	5,000			Debt		$	833			$	1,000
										Equity			3,667				4,000
Total		$	4,500			$	5,000			Total		$	4,500			$	5,000

Assets are proportional to sales. If the dividend payout ratio is fixed at 50%, calculate the required total external financing for growth rates in 2020 of (a) 20%, (b) 25%, and (c) 30%. (Do not round intermediate calculations. Round your answers to 2 decimal places.)

Answer 1

Formula to calculate total external financing
External financing	Increase in assets - Increase in retained earnings
Calculation of external financing if growth rate is 20%
Increase in assets	$1,000	5000*20%
Increase in Retained earnings	Net income*retention ratio
Increase in Retained earnings	(800*(1.20))*50%
Increase in Retained earnings	$480
External financing	1000-480
External financing	$520.00
Calculation of external financing if growth rate is 25%
Increase in assets	$1,250	5000*25%
Increase in Retained earnings	Net income*retention ratio
Increase in Retained earnings	(800*(1.25))*50%
Increase in Retained earnings	$500
External financing	1250-500
External financing	$750.00
Calculation of external financing if growth rate is 30%
Increase in assets	$1,500	5000*30%
Increase in Retained earnings	Net income*retention ratio
Increase in Retained earnings	(800*(1.30))*50%
Increase in Retained earnings	$520.00
External financing	1500-520
External financing	$980.00
Growth rate	External financing
20%	$520.00
25%	$750.00
30%	$980.00