Question

The most recent financial statements for Moose Tours, Inc., appear below. Sales for 2016 are projected to grow by 25 percent. Interest expense will remain constant, the tax rate and the dividend payout rate will also remain constant. Costs, other expenses, current assets, fixed assets, and accounts payable increase spontaneously with sales. MOOSE TOURS, INC 2015 Income Statement Sales Costs Other expenses $744,000 579,000 15,000 Earnings before interest and taxes Interest expense $150,000 11,000 Taxable income Taxes (20%) $139,000 27,800 Net income $111,200 Dividends Addition to retained earnings $22,240 88,960 MOOSE TOURS, INC Balance Sheet as of December 31, 2015 Assets Liabilities and Owners' Equity Current assets Current liabilities $54,500 Cash Accounts receivable Inventory $ 20,340 Acounts payable 32,660 Notes paya 69,620 13,700 $68,200 $127,000 yable Total Total $122,620 Long-term debt Fixed assets Owners' equity Net plant and equipment $420,000 Cmmon stock and paid-in surplus $113,000 Retained earnings 234,420 $347,420 $542,620 Total Total assets $542,620 Total liabilities and owners' equity If the firm is operating at full capacity and no new debt or equity is issued, what external financing is needed to support the 25 percent growth rate in sales? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.) External financing needed 24345

Answer 1

Calculation of additional financing required:

Formula sheet

A	B	C	D	E	F	G	H			K
2
3		Income Statement
4		Sales	744000		Balance sheet
5		Costs	579000		Assets			Liabilities and Equity
6		Other Expenses	15000		Cash	20340		Accounts Payable	54500
7		EBIT	=D4-D5-D6		Account Receivables	32660		Notes Payable	13700
8		Interest	11000		Inventories	69620		Long term Debt	127000
9		Taxable Income	=D7-D8		Total current assets	=SUM(G6:G8)		Total Liabilities	=SUM(J6:J8)
10		Tax (20%)	=D9*20%		Fixed assets	420000		Common Stock	113000
11		Net Income	=D9-D10		Total Assets	=G9+G10		Retained Earnings	234420
12		Cash Dividends	22240					Total Liabilities and Equity	=J9+J10+J11
13		Added retained earnings	=D11-D12
14
15		Sales Growth	0.25
16		Dividend Payout	=D12/D11	=D12/D11
17
18		Additional fund needed (AFN) equation is as follows:
19	Pict Pict Pict
20
21
22
23		Where,
24		A0 = current level of assets
25		ΔS/S0 = percentage increase in sales i.e. change in sales divided by current sales
26		Lo = current level of Spontaneous liabilities (account payables, accrued liaibilities etc.)
27		S1 = new level of sales
28		PM = profit margin
29		b = retention rate = 1 – payout rate
30
31		Current Net Sales, NS0	=D4
32		Total Assets, TA0	=G11
33		Account Payable, AP0	=J6
34		Accrrued Liabilities, AL0	0
35		Net Income, NI0	=D11
36		Retention ratio, RR0	=(1-D16)
37
38		Next Period Sales Growth, g	=D15
39		Next year net sales, NS1	=D31*(1+D38)	=D31*(1+D38)
40		Change in net sales, ∆NS = NS1-NS0	=D39-D31	=D39-D31
41
42		Change in Total Assets, ΔTA = (TA0 / NS0) * ∆NS	=(D32/D31)*D40	=(D32/D31)*D40
43		Change in Spontaneous Liability, Δ(AP + AL)= ((AP0 + AL0)/ NS0) * ∆NS	=((D33+D34)/D31)*D40	=((D33+D34)/D31)*D40
44		Addition to retained earnings = (NS1 * (NI0 / NS0) * RR0)	=(D39*(D35/D31)*D36)	=(D39*(D35/D31)*D36)
45
46		Additional Fund Needed	=(ΔTA) - Δ (AP+AL) - (addition to Retained earnings)
47			=D42-D43-D44	=D42-D43-D44
48
49		Hence additional fund needed is	=D47
50