a. The external finance needed is calculated as shown below:
Income Statement next year | |||
Sales | 3,6480,000 | ||
Costs | 3,206,4000 | ||
Taxable Income | 4,416,000 | ||
Taxes at 35% | 1,545,600 | ||
Net Income | 2,870,400 | ||
Dividends (40%) | 1,148,160 | ||
In addition to retained earnings | 1,722,240 | ||
Assets | Liabilities and Equity | ||
Current Assets | 8,640,000 | Short term debt | 7,680,000 |
Fixed Assets | 21,120,000 | Long term debt | 4,800,000 |
Common Stock | 3,200,000 | ||
Accumulated RE | 12,122,240 | ||
Total Assets | 29,760,000 | Total Liability and Equity | 27,802,240 |
External Financing Needed (EFN) | 1,957,760 |
External Financing needed (EFN) = $1,957,760
b. Proforma financial Statement
Income Statement next year | |||
Sales | 3,6480,000 | ||
Costs | 3,206,4000 | ||
Taxable Income | 4,416,000 | ||
Taxes at 35% | 1,545,600 | ||
Net Income | 2,870,400 | ||
Dividends (40%) | 1,148,160 | ||
In addition to retained earnings | 1,722,240 | ||
Assets | Liabilities and Equity | ||
Current Assets | 8,640,000 | Short term debt | 7,680,000 |
Fixed Assets | 21,120,000 | Long term debt | 4,800,000 |
Common Stock | 3,200,000 | ||
Accumulated RE | 12,122,240 | ||
Total Assets | 29,760,000 | Total Liability and Equity | 27,802,240 |
External Financing Needed (EFN) | 1,957,760 |
c. Sustainable growth rate = ROE * Retention Ratio
Retention Ratio = 60% =0.6
ROE = Net income/ total shareholders equity = 2,392,000/13,600,000 (Numbers from the given data and not the forecast)
ROE = 0.17588
Sustainable growth rate = 0.17588*0.6 = 0.1055
Sustainable growth rate = 10.55%
d. No, Optical Scan cannot eliminate the need for external funds by changing the dividend policy because the EFN is greater than the dividends paid out.
Options available are: Raise the external funds by raising more debt through a bond issue or an equity issue.
External Funds Needed The Optical Scan Company has forecast a 20 percent sales growth rate for...
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