Question

87. The most recent financial statements for Last in Line, Inc, are shown here: Income Statement Balance Sheet Sales Costs Taxable income Taxes (33%) Net income $18,500 Assets $89,510 Debt $19,580 income 14800 3,700 1,221 Equity 69.930 Total $89,510 Total $89,510 $2,479 Assets and costs are proportional to sales. Debt and equity are not. A dividend of $992 was paid, and the company wishes to maintain a constant payout ratio. Next year's sales are projected to be $21,830. What is the amount of the external financing need? A. $12,711 B. $13,333 C. $13,556 D. $13,809 E. $14,357

Answer 1

E. $14,357

An increase of sales to $21,830 is an increase of:

Sales increase = ($21,830 - $18,500) / $18,500

Sales increase = 0.18 or 18%

Assuming costs and assets increase proportionally, the pro forma financial statements will look like this:

Pro forma income statement

Sales	$21,830
Costs	$17,464
EBIT	$4,366
Taxes (33%)	$1,441
Net income	$2,925

Pro forma balance sheet

Assets	$105,622	Debt	$19,580
		Equity	$86,042
Total	$105,622	Total	$105,622

The payout ratio is constant, so the dividends paid this year is the payout ratio from last year times net income, or:

Dividends = ($2,925 / $2,479)($992)

Dividends = $1,170

The addition to retained earnings is:

Addition to retained earnings = $2,925 - $1,170 = $1,755

And the new equity balance is:

Equity = $69,930 + $1,755 = $71,685

So the EFN is:

EFN = Total assets − Total liabilities and equity

EFN = $105,622 - $91,265

EFN = $14,357.

Thanks