Question

Based on the following information, what is EFN is sales are expected to grow at 20% next year? Assume the firm's dividend paid will be the same next year (total $). The firm is currently operating at 90% capacity. Round your answer to the nearest $0.01

Income Statement
Sales	4250
COGS	2700
SG&A	400
Interest expense	75
Taxable income	1075
Taxes	322.5
Net income	752.5
Dividends	600

Assets		Liabilities+OE
Current assets	900	Accounts payable	500
Fixed assets	5000	Long-term debt	4600
		Owner's equity	800
Total Assets	5900	TL+OE	5900

Answer 1

The following formula for External Financing Needs (EFN) can be used for the problem given:

External Financing Needs (EFN) is expressed as:

EFN = (A/S) x (Δ Sales) - (L/S) x (Δ Sales) - (PM x FS x (1-d))

Where,

A / S: Assets that change given a change in sales, expressed as a percentage of sales

Δ = Symbol for Change

ΔSales: Change in sales between the last reporting period and the forecasted sales.

L / S: Liabilities that change given a change in sales, expressed as a percentage of sales.

PM: Profit Margin on Sales; i.e. net income / sales.

FS: Forecasted Sales

d: dividend payout percent

(1 - d): Percent of earnings retained after paying out dividends; d is the dividend payout ratio.

Now, we have;

Total Assets last year = $ 5900

Total Sales last year = $ 4250

Total Current Liabilities last year = Account payable + Dividends + Taxes = $ 1422.50

Profit Margin = Net income / Sales = 752.5 x 100 / 4250 = 17.71 %

Forecasted Sales = Total Sales x Expected growth x Operating capacity = 4250 x 20% x 90% = $ 4590

Dividend Payout Ratio or d = Total dividends x 100 / Net Income = 600 x 100 / 752.5 = 79.73 %

So, A / S = 5900 x100 / 4250 = 138.82 %

L / S = 1422.50 x 100 / 4250 = 33.47 %

Change in Sales or ΔSales = 4590 - 4250 = $ 340

EFN = (A/S) x (Δ Sales) - (L/S) x (Δ Sales) - (PM x FS x (1-d))

or, EFN = (138.82 % x 340) - (33.47% * 340) - {17.71%  x 4590 x (1- 79.73%) }   

or, EFN = 472 - 113.80 - 164.70 = $ 193.50

Hence the External Financing needs = $ 193.50.

Hope this answers the query.