Question

The most recent financial statements for Scott, Inc., appear below. Sales for 2020 are projected to grow by 20 percent. Interest expense will remain constant; the tax rate and the dividend payout rate also will remain constant. Costs, other expenses, current assets, fixed assets, and accounts payable increase spontaneously with sales.

If the firm is operating at full capacity and no new debt or equity is issued, what external financing is needed to support the 20 percent growth rate in sales? (Do not round intermediate calculations.)

SCOTT, INC. 2019 Income Statement Sales $891,600 Costs 727,900 Other expenses 18,240 $145,460 Earnings before interest and taxes Interest expense 13,400 Taxable income Taxes (22%) $132,060 29,053 Net income $ 103,007 Dividends Addition to retained earnings $36,224 66,783

Answer 1

According to the requirement of the question. Sales for 2020 are projected to grow by 20%. Interest expense will remain constant; the tax rate and the dividend payout rate also will remain constant. Costs, other expenses, current assets, fixed assets, and accounts payable increase spontaneously with sales.

Explanation:- Assuming Cost vary with sales and a 20 percent increase in sales.

Income Statement for 2020

Sales ($891,600 + 20%)	$1,069,920
Less : Costs ($727,900 + 20%)	$ (873,480)
Less : Other expenses ($18,240 + 20%)	$ ( 21,888)
Earning Before Interest and Taxes	$ 174,552
Less : Interest Expense (Remain constant)	$ (13,400)
Taxable Income	$ 161,152
Less : Taxes (22% * $161,152)	$ (35,453)
Net Income	$ 125,699

# The payout ratio is constant, so the dividends paid in this year is the payout ratio for the last year times net income.

Dividend for the last year = $ 36,224

Net income for the last year = $ 103,007

Dividend for current year = $ 36,224 / $ 103,007 * $ 125,699 = $ 44,204

# Calculation for the addition to retained earning will be:

Addition to retained earning = $ 125,699 - $ 44,204

Addition to retained earning = $ 81,495

# Calculation for the new retained earning for the new balance sheet will be:

New retained earnings = $ 174,730 + $ 81,495

New retained earnings = $ 256,225

Pro Forma Balance Sheet

Assets	Amount	Liabilities and Owner's Equity	Amount
Current Assets:		Current Liabilities:
Cash	$ 29,136	Account Payable	$78,240
Account Receivable	$ 44,484	Notes Payable (Remains Constant)	$16,320
Inventory	$100,080
Total	$173,700	Total	$94,560
Fixed Assets:		Long Term Debt ( Remains Constant)	$155,000
Net Plant and Equipment	$475,800	Owner's Equity:
		Common Stock and paid in surplus	$130,000
		Retained Earnings(Calculated above)	$256,225
		Total	$386,225
Total Assets	$649,500	Total Liabilities and Owner's Equity	$635,875

Working Note:

Cash = 24,280 + 20% = $ 29,136

Account Receivable = 37,070 + 20% = $ 44,484

Inventory = 83,400 + 20% = $ 100,080

Account Payable = 65,200 + 20% = $ 78,240

Net Plant and Equipment = 396,500 + 20% = $ 475,800

# If the firm is operating at full capacity and no new debt or equity is issued, what external financing is needed to support 20 percent growth rate in Sales?

So, the External financial needed = Total Assets - Total liabilities and equity

= $649,500 - $635,875

Answer : External financial needed = $ 13,625

Thank you..

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