Question

The CEO of Travel the World, Inc. would like to grow the company to $560,500 in sales next year. The finance officer has compiled the data below for the current year. Assets and costs will grow proportionate to sales; debt and equity will not. The dividend payout RATIO will be the same as current year. What is External Financing Needed?

Current Year Data


Sales 480,000
Costs 235,000
Tax rate 21%
Assets 1,400,000
Debt 550,000
Equity 850,000
Dividends 58,880

Answer 1

Ans.

Current Income Statement
Sales	$     480,000
Less : Costs	$     235,000
EBIT	$     245,000
Taxes @ 21%	$       51,450
Net Income	$     193,550

Proforma Income Statement
Sales	$     560,500
Less : Costs [(1+(560,500 – 480,000)/480,000)*235,000]	$     274,411
EBIT	$     286,089
Taxes @ 21%	$       60,079
Net Income	$     226,010

Addition to Retained Earnings = Expected Net Income – Expected Dividends

Since, dividend payout ratio is constant, the value of dividends is as follows:

Expected Dividends = (Current Dividends/Current Net Income)*Expected Net Income = $ 58,880/ $ 193,550 * $ 226,010 = $ 68,754.68 or $ 68,755

Addition to Retained Earnings = Expected Net Income – Expected Dividends = $ 226,010 - $ 68,755 = $ 157,255

Revised Value of Equity = Current Value of Equity + Addition to Retained Earnings = $850,000 + $157,255 = $ 1,007,255

External FInancing Needed = Revised Value of Assets – (Revised Value of Equity + Debt)

External Financing Needed = $ 1,400,000*(1+16.77083333%) – ($ 1,007,255 + 550,000) =$ 1,634,792 - $ 1,557,255 = $ 77,537