Question

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

Statement of Comprehensive Income				Statement of Financial Position
Sales	$	26,400		Assets	$	65,000		Debt	$	27,400
Costs		17,300						Equity		37,600
Taxable income	$	9,100		Total	$	65,000		Total	$	65,000
Taxes (40%)		3,640
Net income	$	5,460

Assets and costs are proportional to sales. Debt and equity are not. A dividend of $2,300 was paid, and suncrest wishes to maintain a constant payout ratio. Next year’s sales are projected to be $30,360.

What is the external financing needed? (Do not round intermediate calculations.)

External financing needed

$

Answer 1

An increase of sales to $30,360 is an increase of:

Sales increase = ($30,360- $26,400) / $26,400

Sales increase = 0.15 or 15%

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

Pro forma income statement

Sales	$30,360
Costs ($17,300 + 15% increase)	$19,895
EBIT	$10,465
Taxes (40%)	$4,186
Net income	$6,279

Pro forma balance sheet

Assets (65,000 + 15% increase)	$74,750	Debt	$27,400
		Equity	$41,234
Total	$74,750	Total	$68634

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

Dividends = ($6279/ 5,460)($2,300)

Dividends = $2,645

The addition to retained earnings is:

Addition to retained earnings = $6279- $2,645 = $3,634

And the new equity balance is:

Equity = $37,600 + $3,634 = $41,234

So the External financing needed is:

External financing needed = Total assets − Total liabilities and equity

External financing needed = $74,750- $68634

External financing needed = $6,116