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14) B Markets has sales of $848,600, net income of $94,000, dividends paid of $28,200, total...

14) B Markets has sales of $848,600, net income of $94,000, dividends paid of $28,200, total assets of $913,600, and current liabilities of $78,900. Assume that all costs, assets, and current liabilities change spontaneously with sales. The tax rate and dividend payout ratios remain constant. If the firm's managers project a firm growth rate of 15 percent for next year, what will be the amount of external financing needed to support this level of growth? Assume the firm is currently operating at full capacity.

A: $49,535

B: $68,211

C: −$10,406

D: $13,909

E; $32,408

Expert Solution

External Financing Needed [EFN]

Profit margin ratio

Profit margin ratio = [Net Income / Sales] x 100

= [$94,000 / $848,600] x 100

= 11.07707%

Dividend pay-out ratio

Dividend pay-out ratio = [Dividend paid / Net Income] x 100

= [$28,200 / $94,000] x 100

= 30%

Expected Next Year Sales

Expected Next Year Sales = Current years sales x [1 + Growth rate]

= $848,600 x [1 + 0.15]

= $848,600 x 1.15

= $975,890

After Tax profit Margin

After Tax profit Margin = Expected Next Year Sales x Profit Margin

= $975,890 x 11.07707%

= $108,100

Dividend Pay-out

Dividend Pay-out = After Tax profit Margin x Dividend Pay-out Ratio

= $108,100 x 30%

= $32,430

Additions to Retained Earnings

Additions to Retained Earnings = After Tax profit Margin - Dividend Pay-out

= $108,100 - $32,430

= $75,670

Increase in Total Assets

Increase in Total Assets = Total Assets x Percentage of Increase in sales

= $913,600 x 15%

= $137,040

Increase in Spontaneous liabilities

Increase in Spontaneous liabilities = Total current liabilities x Percentage of Increase in sales

= $78,900 x 15%

= $11,835

External Financing Needed [EFN]

Therefore, the External Financing Needed [EFN] = Increase in Total Assets – Increase in in Spontaneous liabilities – Additions to retained earnings

= $137,040 - $11,835 - $75,670

= $49,535

jeff jeffy answered 5 months ago

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