Question

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

  

Income Statement				Balance Sheet
Sales	$	40,200		Assets	$	148,000		Debt	$	43,500
Costs		27,300						Equity		104,500
Taxable income	$	12,900		Total	$	148,000		Total	$	148,000
Taxes (23%)		2,967
Net income	$	9,933

  

Assets and costs are proportional to sales; debt and equity are not. A dividend of $3,450 was paid, and the company wishes to maintain a constant payout ratio. Next year’s sales are projected to be $44,622.

  

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

Answer 1

External financing is basically the debt of the company, for this we have to project the balance sheet and the income statement of the company. For this we do some historical analysis, which involves looking at costs as a % of sales and then projecting them further for future.

We can see from the screenshot attached that Net income is 24.71% of sales, similarly for next year we take the same % of sales as net income, which is 11026.

To get the dividend payout ratio, we check the dividend as % of net income which is 34.73%, hence we use the same % in the next year. We get the retained earnings of 7196 in the projected Income statement, which goes into the balance sheet and added to equity.

For assets we see that they were 3.68 times the sale, hence we project them in the projected balance sheet using the same ratio. Now that we have to numbers for assets and equity, we take the difference to find the amount of debt in the balance sheet, which is the external financing.

The total amount of external financing is 52,584, of which 43,500 is already in the balance sheet. Hence, additional external financing in this year would be 9,084.