Question

dividend payout ratio?

addion to retainex earnings?

external financing needed?

4) The Pepper Mill is operating at full capacity. Assets, costs, and current liabilities vary directly with sales. The dividend payout ratio is constant. The firm has sales of $42,700, net income of $5,500, total assets of $48,900, current liabilities of $3,650, long-term debt of $18,100, owners' equity of $27,150, and dividends of $1,925 Assume the sales will grow at 14% Prepare the Current Income Statement and Balance Sheet: Imceme staerant Bme Shect 4 F0o Sales a00 ASsets Tonl Assets Less, Cobs (37) N/I L+E oos's 3/50 CL Less: Ds 47 Lohy-term Dout R.E. 374S0 OE Tohl L toE 42,9 Prepare the Pro-Forma Income Statement and Balance Sheet Bahce sheet Ircane Stenent 4etL) Sales 37 ) LeSs a C5614) N/T 48678 (434608) 4% 14% L+E LiaTo 14% 3650 CR ২,5) 1851-14) LEI) DIKiend 1Tboo La-e r (S575 0M RE. 4o16 14% DE ৪ Tonl LtE What is the dividend payout ratio? What is the addition-to-retained earnings? 8) 1 anr What is the external financing need? Wou 2

Answer 1

a). Dividend Payout Ratio = Dividends Paid / Net Income = $1,925 / $5,500 = 0.35, or 35%

b). Addition to Retained Earnings(Current) = Net Income - Dividends = $5,500 - $1,925 = $3,575

Addition to Retained Earnings(Pro-forma) = Net Income - Dividends = $6,270 - $2,195 = $4,075

Additions to retained earnings ratio = 1 - Payout Ratio = 1 - 0.35 = 0.65, or 65%

c). Additional Funds Needed = [A0 x (ΔS / S0)] - [L0 x (ΔS / S0)] - [S1 x PM x b]

Where,
A_o = current level of assets
L_o = current level of liabilities
ΔS/S_o = percentage increase in sales i.e. change in sales divided by current sales
S₁ = new level of sales
PM = profit margin
b = retention rate = 1 - payout rate

Profit Margin = Net Income / Sales = $5,500 / $42,700 = 0.1288, or 12.88%

AFN = [$48,900 x 0.14] - [$3,650 x 0.14] - [($42,700 * 1.14) x 0.1288 x 0.65]

= $6,846 - $511 - $4,075.50 = $2,259.50