Question

The most recent financial statements for Summer Tyme, Inc., are shown here:

Income Statement		Balance Sheet
Sales	$3,600	Current assets	$5,200	Current liabilities	$790
Costs	2,700	Fixed assets	4,700	Long-term debt	3,640
Taxable income	$900			Equity	5,470
Taxes (31%)	279	Total	$9,900	Total	$9,900
Net income	$621

Assets, costs, and current liabilities are proportional to sales. Long-term debt and equity are not. The company maintains a constant 50 percent dividend payout ratio. As with every other firm in its industry, next year's sales are projected to increase by exactly 25 percent.

Required:

What is the external financing needed? (Do not round your intermediate calculations.)

Answer 1

Taxable income = Sales - costs = ($3,600 * 1.25) - ($2,700 * 1.25) = $1,125

Net income = Taxable income * (1 - tax rate) = $1,125 * (1 - 31%) = $776.25

Addition to retained earnings = Net income * Retention ratio = $776.25 * 50% = $388.125

External fund needed = Increase in assets - Increase in current liabilities - Addition to retained earnings
= ($9,900 * 25%) - ($790 * 25%) - $388.125
= $1,889.375

External fund needed = $1,889.375 or $1,889.38