Question

The 2019 financial statements for Growth Industries are presented below. INCOME STATEMENT, 2019 Sales Costs EBIT Interest expense Taxable income Taxes (at 21%) Net income Dividends $17,380 Addition to retained earnings $17,380 $210,000 155,000 $ 55,000 11,000 $ 44,000 9,240 $ 34,760 Assets Current assets Cash Accounts receivable Inventories Total current assets Net plant and equipment $ 11,000 $ 11,000 110,000 BALANCE SHEET, YEAR-END, 2019 Liabilities Current liabilities $ 4,000 Accounts payable 9,000 Total current liabilities 27,000 Long-term debt $ 40,000 Stockholders' equity 150,000 Common stock plus additional paid in capital Retained earnings $190,000 Total liabilities plus stockholders' equity 15,000 54,000 $190,000 Total assets Sales and costs are projected to grow at 20% 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 75% 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 0.50. What is the required external financing over the next year? (Enter excess cash as a negative number with a minus sign.) External financing

Answer 1

Answer:

External Financing needed:
Pro forma Income statement
Sales 210000*(1+20%)	252000
Less: cost 155000*(1+20%)	186000
EBIT	66000
Less : Interest 110000*10%	11000
Taxable Income	55000
Less : Taxes at 21%	11550
Net Income	43450
Less: Dividends (43450*0.50)	21725
Additions to retained earnings	21725
Calculate of EFN
Increase in current assets 40000*20%	8000
Less: Increase in spontaneous liability (accounts payable) 11000*20%	2200
Total fund needed	5800
Less: Addition to retained earnings	21725
External fund needed	-15925
Sales possible by using 100% of fixed asset capacity 210000/75%	280000
Hence, there is enough capacity to serve the next year projected sales