Question

The most recent financial statements for Crosby, Inc., follow. Sales for 2018 are projected to grow by 20 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.

CROSBY, INC. 2017 Income Statement
Sales				$	747,000
Costs					582,000
Other expenses					18,000
Earnings before interest and taxes				$	147,000
Interest paid					14,000
Taxable income				$	133,000
Taxes (24%)					31,920
Net income				$	101,080
Dividends	$	31,335
Addition to retained earnings		69,745

CROSBY, INC. Balance Sheet as of December 31, 2017
Assets				Liabilities and Owners’ Equity
Current assets				Current liabilities
Cash	$	20,640		Accounts payable	$	54,800
Accounts receivable		43,580		Notes payable		14,000
Inventory		91,960		Total	$	68,800
Total	$	156,180		Long-term debt	$	130,000
Fixed assets				Owners’ equity
Net plant and equipment	$	423,000		Common stock and paid-in surplus	$	114,500
				Retained earnings		265,880
				Total	$	380,380
Total assets	$	579,180		Total liabilities and owners’ equity	$	579,180

If the firm is operating at full capacity and no new debt or equity is issued, what external financing is needed to support the 20 percent growth rate in sales? (Do not round intermediate calculations.)

Answer 1

EFN USING PROFORMA STATEMENTS
INCOME STATEMENT
	2017 Actuals	Basis of projections	2018 Proforma
Sales	$       7,47,000	+20%	$       8,96,400
Costs	$       5,82,000	+20%	$       6,98,400
Other expenses	$           18,000	+20%	$           21,600
Earnings before interest and taxes	$       1,47,000		$       1,76,400
Interest paid	$           14,000		$           14,000
Taxable income	$       1,33,000		$       1,62,400
Taxes (24%)	$           31,920		$           38,976
Net income	$       1,01,080		$       1,23,424
Dividends	$           31,335	31% of net income	$           38,261
Addition to retained earnings	$           69,745		$           85,163
BALANCE SHEET
Assets
Current assets:
Cash	$           20,640	+20%	$           24,768
Accounts receivable	$           43,580	+20%	$           52,296
Inventory	$           91,960	+20%	$       1,10,352
Total current assets	$       1,56,180		$       1,87,416
Fixed assets:
Net plant and equipment	$       4,23,000	+20%	$       5,07,600
Total assets	$       5,79,180		$       6,95,016
Liabilities and Owners’ Equity
Current liabilities:
Accounts payable	$           54,800	+20%	$           65,760
Notes payable	$           14,000		$           14,000
Total current liabilities	$           68,800		$           79,760
Long-term debt	$          1,30,000		$          1,30,000
Total liabilities	$          1,98,800		$          2,09,760
Owners’ equity:
Common stock and paid-in surplus	$          1,14,500		$          1,14,500
Retained earnings	$          2,65,880	+85163	$          3,51,043
Total owners'equity	$          3,80,380		$          4,65,543
Total liabilities and owners’ equity	$          5,79,180		$          6,75,303
		EFN	$             19,713