Question

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

Income Statement				Balance Sheet
Sales	$	8,500		Current assets	$	3,450		Current liabilities	$	2,325
Costs		5,950		Fixed assets		8,900		Long-term debt		3,910
Taxable income	$	2,550						Equity		6,115
Taxes (22%)		561		Total	$	12,350		Total	$	12,350
Net income	$	1,989

Assets, costs, and current liabilities are proportional to sales. Long-term debt and equity are not. The company maintains a constant 45 percent dividend payout ratio. As with every other firm in its industry, next year’s sales are projected to increase by exactly 16 percent.

What is the external financing needed? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

Next year, sales are expected to increase by 16%. Assets, costs and current liabilities are proportional to sales. So they will also increase by 16% each.

Forecasted Sales = 8,500 * (1 + 16%) = $9,860

Forecasted Cost = 5,950 * (1 + 16%) = $6,902

Forecasted taxable income = $9,860 - $6,902 = $2,958

Tax @ 22% = $650.76

Net Income = $2,958 - $650.76 = $2,307.24

Dividend Payout = 45% * $2,307.24 = $1,038.26

Hence Retained earnings increase = Net Income - Dividend Paid = $1,268.98

Total Assets Forecasted = 12,350 * (1 + 16%) = $14,326

Total Current Liabilities Forecasted = 2,325 * (1 + 16%) = $2,697

Total Assets = Total Equity + Long term debt + Current Liabilities

14,326 = Total Equity + Long-term debt + 2,697

Total Equity + Long-term debt = $11,629

Existing Total debt + Equity = 3910 + 6115 = $10,025

Change = 11,629 - 10,025 = $1,604

Out of this $1,268.98 comes from retained earnings and remaining is the external financing needed.

External fincning required =  $1,604 - $1,268.98 = $335.02