Question

The most recent financial statements for Heine, Inc., are shown here: Income Statement Sales Costs Balance Sheet $ 26,900 18,800 $ 63,700 $ 27,900 35,800 Assets Debt Equity $ 63,700 $ 8,100 $ 63,700 Total Taxable income Total Taxes (40%) 3,240 $ 4,860 Net income Assets and costs are proportional to sales. Debt and equity are not. A dividend of $2,300 was paid, and the company wishes to maintain a constant payout ratio. Next year's sales are projected to be $30,935. What is the external financing needed? (Do not round intermediate calculations.) External financing needed 2$

Answer 1

Last Year:

Profit Margin = Net Income / Sales
Profit Margin = $4,860 / $26,900
Profit Margin = 0.18067

Payout Ratio = Dividend / Net Income
Payout Ratio = $2,300 / $4,860
Payout Ratio = 0.47325

Next Year:

Growth Rate = (Sales, Next Year / Sales, Last Year) - 1
Growth Rate = ($30,935 / $26,900) - 1
Growth Rate = 0.15

Addition to Retained Earnings = Sales * Profit Margin * (1 - Payout Ratio)
Addition to Retained Earnings = $30,935 * 0.18067 * (1 - 0.47325)
Addition to Retained Earnings = $2,944

Increase in Assets = $63,700 * 0.15
Increase in Assets = $9,555

External Financing Needed = Increase in Assets - Addition to Retained Earnings
External Financing Needed = $9,555 - $2,944
External Financing Needed = $6,611