Question

The most recent financial statements for Bello, Inc., are shown here: Income Statement Sales $39,000 Costs 26.700 Balance Sheet Assets $142,000 Debt Equity $ 40,500 101,500 Taxable income $ 12,300 Total $142,000 Total $142,000 Taxes (22%) 2,706 Net income $ 9,594 Assets and costs are proportional to sales, debt and equity are not. A dividend of $3,150 was paid, and the company wishes to maintain a constant payout ratio. Next year's sales are projected to be $43,290. What is the external financing needed? (Do not round intermediate calculations.) External financing needed

Answer 1

This Year:

Profit Margin = Net Income / Sales
Profit Margin = $9,594 / $39,000
Profit Margin = 0.2460 or 24.60%

Payout Ratio = Dividends / Net Income
Payout Ratio = $3,150 / $9,594
Payout Ratio = 0.32833 or 32.833%

Next Year:

Growth Rate = (Sales, Next Year / Sales, This Year) - 1
Growth Rate = ($43,290 / $39,000) - 1
Growth Rate = 1.11 - 1
Growth Rate = 0.11 or 11%

Net Income = Sales * Profit Margin
Net Income = $43,290 * 24.60%
Net Income = $10,649.34

Addition to Retained Earnings = Net Income * (1 - Payout Ratio)
Addition to Retained Earnings = $10,649.34 * (1 - 0.32833)
Addition to Retained Earnings = $7,152.84

Increase in Assets = $142,000 * 11%
Increase in Assets = $15,620

External Financing Needed = Increase in Assets - Addition to Retained Earnings
External Financing Needed = $15,620.00 - $7,152.84
External Financing Needed = $8,467.16