For the next fiscal year, you forecast net income of $49,400 and ending assets of 506,900....

For the next fiscal year, you forecast net income of $49,400

and ending assets of 506,900.

Your firm's payout ratio is 10.6 %.

Your beginning stockholders' equity is $299,600 ,

and your beginning total liabilities are $128,200.

Your non-debt liabilities such as accounts payable are forecasted to increase by $10,500.

Assume your beginning debt is $108,200.

What amount of equity and what amount of debt would you need to issue to cover the net new financing in order to keep your debt-equity ratio constant?

Expert Solution

1]	Ending assets [given]	$ 5,06,900
	Ending equity = Beginning equity+(NI-Dividends paid) = 299600+49400*(1-10.6%) =	$ 3,43,764
	Ending total debt [before financing] = 128200+10500 =	$ 1,38,700
	Ending total liabilities & equity [before financing]	$ 4,82,464
	New financing required = 506900-482464 =	$ 24,436
2]	Beginning equity [given]	$ 2,99,600
	Beginning total debt [given]	$ 1,28,200
	D/E = 128200/299600 =	42.79%
3]	Ending equity required to maintain D/E = 506900*(100%/142.79%) =	$ 3,54,997
	Ending debt = 506900*42.79%/142.79% =	$ 1,51,903
	Total	$ 5,06,900
4]	New equity to be issued = 354997-343764 =	$ 11,233
	New debt to be issued = 151903-138700 =	$ 13,203
	Net long term financing	$ 24,436

jeff jeffy answered 1 year ago

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