Question

The Manning Company has financial statements as shown next, which are representative of the company’s historical average. The firm is expecting a 30 percent increase in sales next year, and management is concerned about the company’s need for external funds. The increase in sales is expected to be carried out without any expansion of fixed assets, but rather through more efficient asset utilization in the existing store. Among liabilities, only current liabilities vary directly with sales.

Income Statement
Sales	$	210,000
Expenses		164,700
Earnings before interest and taxes	$	45,300
Interest		7,100
Earnings before taxes	$	38,200
Taxes		15,100
Earnings after taxes	$	23,100
Dividends	$	4,620

Balance Sheet
Assets			Liabilities and Stockholders' Equity
Cash	$	7,500	Accounts payable	$	27,100
Accounts receivable		48,000	Accrued wages		1,350
Inventory		81,000	Accrued taxes		3,050
Current assets	$	136,500	Current liabilities	$	31,500
Fixed assets		81,000	Notes payable		7,100
			Long-term debt		15,500
			Common stock		121,000
			Retained earnings		42,400
Total assets	$	217,500	Total liabilities and stockholders' equity	$	217,500

  

Using the percent-of-sales method, determine whether the company has external financing needs, or a surplus of funds.

Answer 1

The Manning company	Amt $
Sales =S	$                  210,000
EBT	$                    38,200
Taxes	$                    15,100
Net Income	$                    23,100
Net Income %=	11.00%
Dividend paid	$                      4,620
Dividend payout ratio=	20%
Dividend Retention %=	80%
Increase in sales =	30%

Total Spontaneous Asset=Current Asset=A	$                  136,500
Spontaneous Liability =L=Current Liabilities	$                    31,500
Delta Sales =	$                    63,000
Next Years increased sales =S1=	$               273,000.0
m=net profit margin=	11%
dividend payout ratio=	20%
Asset/Sales =A/S =	0.6500
Liability/Sales =L/S=	0.1500
External Finance needed=EFN formual is below;
EFN= A/S*deltaS-L/S*deltaS-m*S1*(1-d)
EFN =0.650*63000-0.1500*63000-11%*273000*80%
EFN =7,476
So the external financing needed is $7,476