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 Addition to retained earnings 300,000 200,000 100,000 20,000 80,000 16,800 63,200 $ $ 18,96€ $ 44,240 Assets Current assets Cash Accounts receivable Inventories Total current assets Net plant and equipment $ $ BALANCE SHEET, YEAR-END, 2019 Liabilities Current liabilities $ 6,000 Accounts payable 11,000 Total current liabilities 33,000 Long-term debt $ 50,000 Stockholders' equity 240,000 Common stock plus additional paid in capital Retained earnings $ 290,000 Total liabilities plus stockholders' equity 13,000 13,000 200,000 15,000 62,000 $ 290,000 Total assets

Sales and costs are projected to grow at 30% 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 0.30.

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

solution: Pro Forma Income Statement Sales costs EBIT Interest Taxable income Taxes (35%) Net income Dividends: Addition to retained earning working 300000*1.3 390000 200000*1.3 260000 130000 200000*0.1 | 20000 110000 23100 86900 86900*0.3 / 26070 60830 calculation of EFN Increase in fixed assets** Increase in Current assets Less : Increase in spontaneous liability (accounts payable) total fund needed Less : addition to retained earning EFN - 50000*0.3 13000*0.3 0 15000 -3900 111001 -60830 -49730 ** working: sales possible by using 100% of fixed asset capacity =300000/0.75 Hence, there is enough capacity to serve the projected sales. 400,000 300,000