In: Accounting
Given the financial statements below for Dragonfly Enterprises,
what is the external financing need for a pro forma increase in
sales of 18% if the firm is operating at 90% capacity? Enter your
answer as the nearest whole (e.g., 123), but do not include the $
sign.
Dragonfly Enterprises |
||
Income Statement ($ Million) |
2011 |
|
Sales |
370 |
|
Cost of Goods Sold |
226 |
|
Selling, General, & Admin Exp. |
62 |
|
Depreciation |
20 |
|
Earnings Before Interest & Taxes |
62 |
|
Interest Expense |
12 |
|
Taxable Income |
50 |
|
Taxes at 40% |
20 |
|
Net Income |
30 |
|
Dividends |
9 |
|
Addition to Retained Earnings |
21 |
|
Balance Sheets as of 12-31 |
||
Assets |
2010 |
2011 |
Cash |
10 |
10 |
Account Receivable |
46 |
50 |
Inventory |
43 |
45 |
Total Current Assets |
99 |
105 |
Net Fixed Assets |
166 |
195 |
Total Assets |
265 |
300 |
Liabilities and Owners Equity |
2010 |
2011 |
Accounts Payable |
26 |
30 |
Notes Payable |
0 |
0 |
Total Current Liabilities |
26 |
30 |
Long-Term Debt |
140 |
150 |
Common Stock |
22 |
22 |
Retained Earnings |
77 |
98 |
Total Liab. and Owners Equity |
265 |
300 |
ANSWER
Calculation of external financing needed for a pro forma increase in sales of 18% if the company is operating at 90% capacity | |||
External financing needed = Increase in Fixed assets + Increase in current assets - Increase in spontaneous liabilities - Increase in retained earnings | |||
Increase in Fixed assets = Net Fixed assets for 2011 x Sales growth % in excess of 100% capacity = $195 million x 8% = $15.60 millions | |||
Increase in Current assets = Current assets for 2011 x Sales growth % = $105 millions x 18% = $18.90 millions | |||
Increase in spontaneous liabilities = Accounts Payable for 2011 x sales growth % = $30 millions x 18% = $5.40 millions | |||
Increase in retained earnings = Sales for 2011 x [1+sales growth %] x Profit Margin % for 2011 x [1 - dividend payout ratio for 2011] | |||
Profit margin % for 2011 = Net income / Sales = $30 million / $370 million = 8.11% | |||
Dividend payout ratio for 2011 = Dividends / Net Income = $9 million / $30 million = 30% | |||
Increase in retained earnings = $370 million x [1+0.18] x 8.11% x [1 - 0.30] = $24.78 millions | |||
External financing needed = $15.60 million + $18.90 million - $5.40 million - $24.78 million = $4.32 millions | |||
External financing needed = 4,320,000 |
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