Question

The 2019 financial statements for Growth Industries are presented below.

INCOME STATEMENT, 2019
Sales				$	250,000
Costs					175,000
EBIT				$	75,000
Interest expense					15,000
Taxable income				$	60,000
Taxes (at 21%)					12,600
Net income				$	47,400
Dividends	$	28,440
Addition to retained earnings	$	18,960

  

BALANCE SHEET, YEAR-END, 2019
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 plus 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.

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

Answer 1

External financing is the means of financing through external means like bank, creditors or markets. Retained earnings balance shall be reduced from working capital required in order to get external financing.

Sales	250,000 * 1.4	$                  350,000
Less: costs	175000 * 1.4	$            (245,000)
EBIT		$                  105,000
Interest	150000 * 10%	$          (15,000)
Taxable income		$            90,000
Less: Tax at 21%	90000 * 21%	$              (18,900)
Net income		$              71,100
Dividends	71100*0.6	$            (42,660)
Additions to retained earnings		$           28,440
Increase in current assets	50000 * 0.4	$              20,000
Less: increase in current liabilities	15000 *0.4	$             (6,000)
Total fund needed		$          14,000
Less: addition to retained earnings		$           (28,440)
External financing needed		$         (14,440)

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