Question

ch.18#1

The 2017 financial statements for Growth Industries are presented below.

INCOME STATEMENT, 2017
Sales				$	250,000
Costs					175,000
EBIT				$	75,000
Interest expense					15,000
Taxable income				$	60,000
Taxes (at 35%)					21,000
Net income				$	39,000
Dividends	$	23,400
Addition to retained earnings		15,600

  

BALANCE SHEET, YEAR-END, 2017
Assets					Liabilities
Current assets					Current liabilities
Cash	$	8,000			Accounts payable	$	15,000
Accounts receivable		13,000			Total current liabilities	$	15,000
Inventories		29,000			Long-term debt		150,000
Total current assets	$	50,000			Stockholders’ equity
Net plant and equipment		190,000			Common stock plus additional paid-in capital		15,000
					Retained earnings		60,000
Total assets	$	240,000			Total liabilities and stockholders' equity	$	240,000

  

Sales and costs are projected to grow at 40% 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 70% 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 0.60.

Q: What is the required external financing over the next year? (Enter excess cash as a negative number with a minus sign.)

Answer 1

solution: Pro Forma Income Statement Sales working 250000*1.4 175000*1.4 150000*0.1 costs EBIT Interest Taxable income Taxes (35%) Net income Dividends: Addition to retained earning 350000 245000 105000 15000 90000 31500 58500 35100 23400 58500*0.6 0 calculation of EFN Increase in fixed assets** Increase in Current assets Less : Increase in spontaneous liability (accounts payable) total fund needed Less : addition to retained earning EFN 50000*0.4 15000*0.4 20000 -6000 14000 -23400 -9400 ** working: sales possible by using 100% of fixed asset capacity =250000/0.7 Hence, there is enough capacity to serve the projected sales. l 357,143 |