Question

The most recent financial statements for Heine, Inc., are shown here: Income Statement Balance Sheet Sales $ 23,500 Assets $ 53,400 Debt $ 20,200 Costs 14,900 Equity 33,200 Taxable income $ 8,600 Total $ 53,400 Total $ 53,400 Taxes (40%) 3,440 Net income $ 5,160 Assets and costs are proportional to sales. Debt and equity are not. A dividend of $2,100 was paid, and the company wishes to maintain a constant payout ratio. Next year’s sales are projected to be $27,025. What is the external financing needed? (Do not round intermediate calculations.)

Answer 1

Let us first calculate the change in assets:

Asset Turnover = Sales/Total Assets = 23,500/53,400 = 0.44 --> This is to remain constant.

So forecasted assets based on forecasted sales = 27,025/0.44 (using Asset turnover formula) = $61,410

Now, let us calculate the amount of net income and dividend paid.

Now, since the operating costs are percent of sales and is same for both years and taxes are also constant (at 40%) in both years, Net profit margin would also be same.

Net profit margin = Net Income/Sales

For current year, Net profit margin = 5,160/23,500 = 21.957%

For forecasted year, Net income = 21.957% * 27,025 = $5,934

Dividend payout ratio is expected to remain constant and in same proporion = (2100/5160)*5934 = $2,415

Hence Retained earnings for forecasted year = Net Income - Dividends paid = $5,934 - $2,415 = $3,519

This amount would be added to equity.

Now, remember the balance sheet concept, Total Assets = Shareholders' equity + Liabilities

So, Change in Assets = Change in (Shareholders' equity + Libailities)

(61,410 - 53,400) = Change in (Shareholders' equity + Libailities)

Change in (Shareholders' equity + Libailities) = $8,010

Out of this change, $3,519 will be from retianed earnings, remaining would be required through external sources (additional debt or additional equity) = 8010 - 3519 = $4,491 --> Answer