Question

In: Finance

Consider the following information for the percentage of sales approach: Sales = $3M, NI = $0.4M,...

Consider the following information for the percentage of sales approach:

Sales = $3M, NI = $0.4M, Div = $0.1M

Total Asset = $4M

Current Liability $0.2M

Long-term debt = $1M

Equity = $2.8M

If sales increase by 25% (and NI, assets, and CL increase at the same rate), calculate the external financing needed.

0.575

0.400

0.437

0.485

0.521

Expert Solution

In percentage of sales approach, net income will also increase by the same rate as sales.

Dividend paid will also increase at the same rate as sales

Firstly, we need to calculate the amount that will be added to the retained earnings in the forecase period by deducting dividend paid from net income.

Then, we can add the amount calculated above to equity.

Assets and Current liabliity also increase at the same rate as sales.

We know that the assets and Liabilities+Equity should be equal. So, the difference between the Total assets and Liabilities+Equity will be the external financing needed. We n

Calculation is as follows:

Formulas:

jeff jeffy answered 2 years ago

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