Question

he most recent financial statements for Retro Machine, Inc., follow. Sales for 2021 are projected to grow by 30 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.

RETRO MACHINE, INC. 2020 Income Statement
Sales				$	752,000
Costs					587,000
Other expenses					23,000
Earnings before interest and taxes				$	142,000
Interest paid					19,000
Taxable income				$	123,000
Taxes (24%)					29,520
Net income				$	93,480
Dividends	$	28,044
Addition to retained earnings		65,436

RETRO MACHINE, INC. Balance Sheet as of December 31, 2020
Assets				Liabilities and Owners’ Equity
Current assets				Current liabilities
Cash	$	21,140		Accounts payable	$	55,300
Accounts receivable		44,080		Notes payable		14,500
Inventory		96,960		Total	$	69,800
Total	$	162,180		Long-term debt	$	135,000
Fixed assets				Owners’ equity
Net plant and equipment	$	428,000		Common stock and paid-in surplus	$	117,000
				Retained earnings		268,380
				Total	$	385,380
Total assets	$	590,180		Total liabilities and owners’ equity	$	590,180

If the firm is operating at full capacity and no new debt or equity is issued, what is the external financing needed to support the 30 percent growth rate in sales? (Do not round intermediate calculations.)

Answer 1

We can calculate the External Financing needed as follows:

Dividend Rate = Dividend Paid in 2020 / Net Income

= 28,044 / 93,480

= 30%

It is also assumed that the Notes Payables increase with the increase in sales

Formulas used in the Excel sheet are:

So, the amount of External Financing comes out to be $ 76,310