Question

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?

Answer 1

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