Question

The most recent financial statements for Moose Tours, Inc., appear below. Sales for 2016 are projected to grow by 25 percent. Interest expense will remain constant; the tax rate and the dividend payout rate will also remain constant. Costs, other expenses, current assets, fixed assets, and accounts payable increase spontaneously with sales.

MOOSE TOURS, INC. 2015 Income Statement
Sales				$	750,000
Costs					585,000
Other expenses					21,000
Earnings before interest and taxes				$	144,000
Interest expense					17,000
Taxable income				$	127,000
Taxes (20%)					25,400
Net income				$	101,600
Dividends	$	20,320
Addition to retained earnings		81,280

  

MOOSE TOURS, INC. Balance Sheet as of December 31, 2015
Assets				Liabilities and Owners’ Equity
Current assets				Current liabilities
Cash	$	20,940		Accounts payable	$	55,100
Accounts receivable		33,260		Notes payable		14,300
Inventory		70,220
				Total	$	69,400
Total	$	124,420		Long-term debt	$	133,000
Fixed assets				Owners’ equity
Net plant and equipment	$	360,000		Common stock and paid-in surplus	$	119,000
				Retained earnings		163,020
				Total	$	282,020
Total assets	$	484,420		Total liabilities and owners’ equity	$	484,420

If the firm is operating at full capacity and no new debt or equity is issued, what external financing is needed to support the 25 percent growth rate in sales? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)

Answer 1

Assuming costs vary with sales and a 25 percent increase in sales, the pro forma income statement will look like this:

MOOSE TOURS INC.

Pro Forma Income Statement Sales $ 937,500

Costs                                   731,250

Other expenses                     26,250

EBIT                             $    180,000

Interest                                  17,000

Taxable income            $    163,000

Taxes(20%)                          32,600

Net income                   $    130,400

The payout ratio is constant, so the dividends paid this year is the payout ratio from last year times net income, or:

Dividends = ($20,320/$101,600)($130,400) Dividends = $26,080

And the addition to retained earnings will be: Addition to retained earnings = $130,400 – 26,080

Addition to retained earnings = $104,320

The new accumulated retained earnings on the pro forma balance sheet will be: New accumulated retained earnings = $163,020 + 104,320

New accumulated retained earnings = $267,340

The pro forma balance sheet will look like this:

MOOSE TOURS INC.

Pro Forma Balance Sheet

Assets		Liabilities and Owners’ Equity
Current assets		Current liabilities
Cash	$       26,175	Accounts payable           $        68,875
Accounts receivable	41,575	Notes payable                           14,300
Inventory	87,775	Total                        $        83,175
Total	$      155,525	Long-term debt                              133,000
Fixed assets
Net plant and		Owners’ equity
equipment	450,000	Common stock and
		paid-in surplus	$     119,000
		Retained earnings	267,340
		Total	$     386,340
		Total liabilities and owners’
Total assets	$      605,525	equity	$     602,515

So, the EFN is:

EFN = Total assets – Total liabilities and equity EFN = $605,525 – 602,515

EFN = $3,010