Question

P4-4 EFN [LO2]

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

Income Statement		Balance Sheet
Sales	$23,800	Assets	$114,000	Debt	$33,600
Costs	16,600			Equity	80,400
Taxable income	$7,200	Total	$114,000	Total	$114,000
Taxes (30%)	2,160
Net income	$5,040

Assets and costs are proportional to sales. Debt and equity are not. A dividend of $1,560 was paid, and the company wishes to maintain a constant payout ratio. Next year's sales are projected to be $28,000.

Required:

What is the external financing needed?

rev: 09_17_2012

$10,119

$195,106

$16,023

$12,481

$11,300

NOTE: Also struggling finding the % of sales growth?

Answer 1

Percentage of sales growth = (28000 - 23800 ) / 23800

Percentage of sales growth = 0.17647 or 17.647%

Assuming costs and assets increase proportionally, the pro forma financial statements will look like this:

Income statement:

Sales = 28000

Costs = 19529.40 ( 16600 * 1.17647 = 19529.40)

Taxable income = 8470.58 ( 7200 * 1.17647 = 8470.58)

Taxes = 2541.17 ( 2160 * 1.17647 = 2541.17)

Net income = 5929.4

Blanace sheet:

Assst:

134,117.58

Total = 134,117.58  

Debt:

33600

Equity:

84494.83 ( Calculation has been shown below)

Total = 33600 + 84494 = 118094.83

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

Dividends = (5929 / 5040) * 1560

Dividends = 1835.16

The addition to retained earnings is:

Addition to retained earnings = 5929 - 1835.16

Addition to retained earnings = 4094.83

New equity balance:

Equity = 80400 + 4094.83

Equity = 84494.83

EFN is:

EFN = Total assets ? Total liabilities and equity

EFN = 134,117.58 - 118094.83

EFN = 16,023