Question

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Last year's financial statements for VanDiest Chemical are below. VanDiest is expecting sales to grow by 15 percent this year. Their tax rate is 25 percent and their dividend payout rate is expected to remain at 25 percent. Costs, selling and administration expense, current assets, accounts payable, and accrued taxes increase proportionally with sales. Interest expense. notes payable, and long-term debt will be unchanged. Van Diest is operating at full capacity Income Statement Last Year Sales 780,000 Costs of goods sold 483,600 Selling and admin, expenso 140,400 Earnings before interest & taxes 156,000 Interest expense 39.000 Earnings before taxes 117.000 Balance Sheet Taxes 29,250 Assets Liabilities and Owners' Equity Net income 87.750 Dividends 21,938 Cash 39,000 Accounts payable 62.400 Additions to retained earnings 65.813 Accounts 85.800 Notes payable 78.000

Answer 1

32,760 [218,400 x 15% --> As current assets vary with sales proportionately] Increase in Assets Less: Increase in Liabilities Increase in Retained Earnings External Financing Needed (EFN) -11,700 [(62,400 + 15,600) x 15% --> As accounts payable & accrued taxes vary with sales proportionately] -78,975 (Ref: Workings] -57,915 EFN is negative because there is more increase in liabilities and retained earnings (which are sources) than expected increase in assets (which is application). Workings: Earnings before interest and taxes Less: Interest expense Earnings before taxes Less: Taxes Net income Less: Dividends Additions to retained earnings Expected 179,400 (156000 X (1+15%)] 39,000 [Remained unchanged] 140,400 35,100 (140400 x 25%] 105,300 26,325 [105300 x 25% --> Payout ratio is 25%] $78,975 Plant & Equipment, Note payable, Long-Term Debt and Common stock are not expected to vary in with sales and so not considered in EFN calculation.