Question

The most recent financial statements for GPS, Inc., are shown here:

Income Statement		Balance Sheet
Sales	$22,300	Assets	$105,000	Debt	$33,600
Costs	16,000			Equity	71,400
Taxable income	$6,300	Total	$105,000	Total	$105,000
Taxes (30%)	1,890
Net income	$4,410

Assets and costs are proportional to sales. Debt and equity are not. A dividend of $1,610 was paid, and the company wishes to maintain a constant payout ratio. Next year's sales are projected to be $28,900.

Required:

What is the external financing needed?

Answer 1

	External Financing Needed		$     27,447.65
Working:
a.	Calculation of dividend payout ratio
	Dividend Payout Ratio			=	Dividend / Net Income
				=	$ 1,610	/	$             4,410
				=	36.51%
	The company wishes to maintain same payout ratio.So, payout ratio for next year will be same as above.
b.
	Next Year's Assets		$       1,05,000	x	(28900/22300)	=	$ 1,36,076.23
	Existing Assets						$ 1,05,000.00
	Chage in Assets						$     31,076.23
c.	Next Year's Costs	=	$           16,000	x	(28900/22300)	=	$     20,735.43
d.
	Next Years Sales				$      28,900.00
	Costs				$      20,735.43
	Taxable Income				$        8,164.57
	Taxes (30%)				$        2,449.37
	Net Income				$        5,715.20
e.	Retained Earning	=	$       5,715.20	x (1-0.3651)		=	$       3,628.58
f.	Change in Assets		$     31,076.23
	retained Earning		$       3,628.58
	External Financing needed		$     27,447.65