Question

The most recent financial statements for Cardinal, Inc., are shown here: Income Statement Sales Costs Balance Sheet $29,800 Assets $70,800 Debt $34,600 Equity 36,200 18,250 Taxable 11,550 Tota $70,800 Total $70,800 income Taxes (22%) 2,541 Net income $9,009 Assets and costs are proportional to sales. Debt and equity are not. A dividend of $3,400 was paid, and the company wishes to maintain a constant payout ratio. Next year's sales are projected to be $33,972 What is the external financing needed? (Do not round intermediate calculations.) External financing needed

Answer 1

	New Income Statement
Sales			33972
Costs			20805
Taxable Income			13167
Tax (22%)			2896.74
Net Income			10270.26
Dividend			3875.996

> Since, costs are a function of sales,

Costs at new sales level = 18250/29800 * 33972

> Since, constant dividend payout ratio is to be maintained,

Dividend = (3400*100)9009 * 10270.26

	Balance sheet
	Assets	80712		Debt	44512
				Equity	36200
		80712			80712

Assets are a function of Sales (according to question), equity is the same, hence external debt financing by $9,912.

Answer 2

It is quoted that all cost and assets are proportional to sales. Thus, increase in sales is calculated as follows: New sales-old sales Percentage increase in sales = Old sales $33.973-$29.800 $29.800 =14% Therefore, there is 14 % increase in sales. Thus, cost and assets of the company will also increase by 14%. Following is the new income statement of the company after 14% increase: Amount $33,972 $20.805 Particulars New sales Increased cost (1.14x $18,250) Total income Taxes (22%) Net income $13,167 $2.896.74 $10.270.26 Company maintains the constant dividend payout ratio. Calculate dividend payout ratio as follows: Dividend Dividend payout ratio=- Net income $3,400 $9.009 = 37.74% Dividends=37.74%$10,270.26 =$3.875.9961 Amount added to retained earnings (equity) = Net income-Dividends =$10.270.26-53,875.9961 = $6,394.2639 Additional retained earning is added to old equity as follows: New equity = $36,200+$6,394.2639 =$42,594.2639 As the equity is change, the debt of the company will also change, change in debt of the company is the amount that company needs from external financing. New debt=New assets-Newequity =(1.14 $70.800)-$42.594.2639 =$80,712-542,594.2639 =$38.117.7361 Calculation of change in debt: Change in debt=New debt-old debt =$38,117.7361-$34,600 =$3,517.7361 Thus, external financing needed is $3,517.74.