Question

The 2017 financial statements for Growth Industries are presented below. INCOME STATEMENT, 2017 Sales $ 240,000 Costs 170,000 EBIT $ 70,000 Interest expense 14,000 Taxable income $ 56,000 Taxes (at 35%) 19,600 Net income $ 36,400 Dividends $ 18,200 Addition to retained earnings 18,200 BALANCE SHEET, YEAR-END, 2017 Assets Liabilities Current assets Current liabilities Cash $ 7,000 Accounts payable $ 14,000 Accounts receivable 12,000 Total current liabilities $ 14,000 Inventories 21,000 Long-term debt 140,000 Total current assets $ 40,000 Stockholders’ equity Net plant and equipment 180,000 Common stock plus additional paid-in capital 15,000 Retained earnings 51,000 Total assets $ 220,000 Total liabilities and stockholders' equity $ 220,000 Sales and costs are projected to grow at 30% a year for at least the next 4 years. Both current assets and accounts payable are projected to rise in proportion to sales. The firm is currently operating at 75% capacity, so it plans to increase fixed assets in proportion to sales. Interest expense will equal 10% of long-term debt outstanding at the start of the year. The firm will maintain a dividend payout ratio of 0.50. What is the required external financing over the next year? (Negative amounts should be indicated by a minus sign.)

Answer 1

Net plant & equipment in 2017	180000	75% capacity
Sales 2017	240000
At 100% capacity
Sales at 100%	320000
Thus, net plant and equipment	240000
Additional investment required for acquisition of fixed assets
Thus, net plant and equipment	240000
Less: Existing plant and equipment	180000
Additional investment required	60000
Less: Retained earnings	51000
Required external financing for next year	9000

The net plant and equipment current is at $180000 and the sales is at 75% capacity. Considering the company wants to increase its capacity to 100% the sales will increase and the net plant and equipment will also have to be increased accordingly. Thus, the net plant and equipment should be $240000 in order to operate at 100% capacity accordingly, the financing requirement has been calculated in the table above.

Thus, external financing will be required to the extent of $9000 as the company already has a retained earnings of $51000.