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The most recent financial statements for Cornwall, Inc., are shown here: Income Statement Balance Sheet   Sales...

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

Income Statement Balance Sheet
  Sales $ 5,800 Current assets $ 2,500 Current liabilities $ 2,200
  Costs 4,400 Fixed assets 8,100 Long-term debt 3,750
  Taxable income $ 1,400 Equity 4,650
  Taxes (34%) 476   Total $ 10,600   Total $ 10,600
    Net income $ 924

Assets, costs, and current liabilities are proportional to sales. Long-term debt and equity are not. The company maintains a constant 30 percent dividend payout ratio. As with every other firm in its industry, next year’s sales are projected to increase by exactly 10 percent.

What is the external financing needed?

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Expert Solution

External Financing Needed $ 775.32

Working:

Increase in Assets = Existing Assets x Proprtionate increase = $       10,600 x 10% = $       1,060
Increase in Current Liabilities = Existing current iabiities x proprtionate increase = $    2,200 x 10% = $        220
Increase in Net Income = Net Income x Proportionate increase = $        924 x 10% = $       92.4
Retained Earning = Net Income x (1-Dividend Payout Ratio) = $       92.4 x (1-0.30) = $       64.68
External Financing needed = Increase in Assest - Increase in current Liabilities -retained Earning
= $    1,060 - $        220 - $         64.68
= $ 775.32

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