Question

The most recent financial statements for Crosby, Inc., follow. 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.

CROSBY, INC. 2017 Income Statement
Sales				$	768,000
Costs					624,000
Other expenses					31,500
Earnings before interest and taxes				$	112,500
Interest paid					16,000
Taxable income				$	96,500
Taxes (25%)					24,125
Net income				$	72,375
Dividends	$	22,740
Addition to retained earnings		49,635

CROSBY, INC. Balance Sheet as of December 31, 2017
Assets				Liabilities and Owners’ Equity
Current assets				Current liabilities
Cash	$	25,740		Accounts payable	$	63,400
Accounts receivable		35,210		Notes payable		19,100
Inventory		71,870		Total	$	82,500
Total	$	132,820		Long-term debt	$	116,000
				Owners’ equity
Fixed assets				Common stock and paid-in surplus	$	111,000
Net plant and equipment	$	225,000		Retained earnings		48,320
				Total	$	159,320
Total assets	$	357,820		Total liabilities and owners’ equity	$	357,820

Complete the pro forma income statements below. (Input all answers as positive values. Do not round intermediate calculations.)

Calculate the EFN for 20, 25 and 30 percent growth rates. (Do not round intermediate calculations. A negative answer should be indicated by a minus sign.)

Answer 1

External financing is required when the working capital falls below the required level. External finance needed is computed by deducting accounts payable and retained earnings from total assets requirement.

	Current	20% Sales Growth	25% Sales Growth	30% Sales Growth
Sales	768000	$                  921,600	$                  960,000	$                     998,400
Costs	624000	$                  748,800	$                  780,000	$                     811,200
Other Expenses	31500	$                    37,800	$                    39,375	$                       40,950
EBIT	112500	$                  135,000	$                  140,625	$                     146,250
Interest Paid	16000	$                    16,000	$                    16,000	$                       16,000
Taxable Income	96500	119000	124625	130250
Taxes @ 25%	24125	29750	31156.25	32562.5
Net Income	72375	89250	93468.75	97687.5
Dividends (31.42%)		$                   28,042	$                    29,368	$                       30,693
Addition to RE		$                    61,208	$                    64,101	$                       66,994

Dividend payout ratio = current dividend/net income = 22,740/72375= 31.42%

	20%	25%	30%
Increase in assets [2017 Assets x Sales growth %]	$71,564	$89,455	$107,346
Less : Increase in accounts Payable [2017 Accounts Payable x Sales growth %]	$12,680	$15,850	$19,020
Less : Addition to Retained Earnings	$                       61,208	$                    64,101	$                    66,994
External finance needed	($2,324)	$9,504	$21,332