Question

Given the financial statements below for Dragonfly Enterprises, what is the external financing need for a pro forma increase in sales of 19% if the company is operating at 90% capacity? Enter your answer as the nearest whole (e.g., 123), but do not include the $ sign.

  

Dragonfly Enterprises
Income Statement ($ Million)		2011
Sales		370
Cost of Goods Sold		226
Selling, Gen & Admin Exp		62
Depreciation		20
Earnings Before Int & Tax		62
Interest Expense		12
Taxable Income		50
Taxes at 40%		20
Net Income		30
Dividends		9
Addition to Retained Earn.		21
Balance Sheets as of 12-31
Assets	2010	2011
Cash	10	10
Account Receivable	46	50
Inventory	43	45
Total Current Assets	99	105
Net Fixed Assets	166	195
Total Assets	265	300
Liabilities and Owners Equity	2010	2011
Accounts Payable	26	30
Notes Payable	0	0
Total Current Liabilities	26	30
Long-Term Debt	140	150
Common Stock	22	22
Retained Earnings	77	98
Total Liab. and Owners Eq	265	300

Answer 1

Calculation of external financing needed for a pro forma increase in sales of 19% if the company is operating at 90% capacity

External financing needed = Increase in Fixed assets + Increase in current assets - Increase in spontaneous liabilities - Increase in retained earnings

Increase in Fixed assets = Net Fixed assets for 2011 x Sales growth % in excess of 100% capacity = $195 million x 9% = $17.55 millions

Increase in Current assets = Current assets for 2011 x Sales growth % = $105 millions x 19% = $19.95 millions

Increase in spontaneous liabilities = Accounts Payable for 2011 x sales growth % = $30 millions x 19% = $5.70 millions

Increase in retained earnings = Sales for 2011 x [1+sales growth %] x Profit Margin % for 2011 x [1 - dividend payout ratio for 2011]

Profit margin % for 2011 = Net income / Sales = $30 million / $370 million = 8.11%

Dividend payout ratio for 2011 = Dividends / Net Income = $9 million / $30 million = 30%

Increase in retained earnings = $370 million x [1+0.19] x 8.11% x [1 - 0.30] = $24.99 millions

External financing needed = $17.55 million + $19.95 million - $5.70 million - $24.99 million = $6.81 millions

External financing needed = 68,10,000