Question

The most recent financial statements for Cornwall, Inc., are shown here: Income Statement Balance Sheet Sales $ 7,400 Current assets $ 4,100 Current liabilities $ 2,200 Costs 6,000 Fixed assets 9,800 Long-term debt 3,750 Taxable income $ 1,400 Equity 7,950 Taxes (34%) 476 Total $ 13,900 Total $ 13,900 Net income $ 924 Assets, costs, and current liabilities are proportional to sales. Long-term debt and equity are not. The company maintains a constant 20 percent dividend payout ratio. As with every other firm in its industry, next year’s sales are projected to increase by exactly 15 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

Previous Year:

Sales = $7,400
Total Assets = $13,900
Current Liabilities = $2,200
Net Income = $924
Payout Ratio = 20%

Profit Margin = Net Income / Sales
Profit Margin = $924 / $7,400
Profit Margin = 231 / 1850

Next Year:

Increase in sales = 15%

Sales = $7,400 * 1.15
Sales = $8,510

Net Income = Sales * Profit Margin
Net Income = $8,510 * 231/1850
Net Income = $1,062.60

Addition to Retained Earnings = Net Income * (1 - Dividend Payout Ratio)
Addition to Retained Earnings = $1,062.60 * (1 - 0.20)
Addition to Retained Earnings = $850.08

Increase in Total Assets = $13,900 * 15%
Increase in Total Assets = $2,085

Increase in Current Liabilities = $2,200 * 15%
Increase in Current Liabilities = $330

External Financing Needed = Increase in Total Assets - Addition to Retained Earnings - Increase in Current Liabilities
External Financing Needed = $2,085 - $850.08 - $330
External Financing Needed = $904.92