Question

The most recent financial statements for Summer Tyme, Inc., are shown here: $910 Income Statement Balance Sheet Current Sales $3,700 Current assets $4,900 liabilities Costs 1,900 Fixed assets Long-term 5,000 debt Taxable income $1,800 Equity Taxes (32%) 576 Total $9,900 Total Net income $1,224 3,610 5,380 $9,900 Assets, costs, and current liabilities are proportional to sales. Long-term debt and equity are not. The company maintains a constant 40 percent dividend payout ratio. As with every other firm in its industry, next year's sales are projected to increase by exactly 30 percent. Required: What is the external financing needed? (Do not round your intermediate calculations.) Multiple Choice $1,083 U O $1,792.28 O $1,692.28 O $1,742.28 O $2.015.28

Answer 1

Question 1
The Solution is Option 2: $ 1,742.28
Ratio with respect to sales
Sales	3,700
Costs	1,900
Costs to sales	51.35%
Current assets	4,900
Current assets to sales	132.43%
Fixed assets	5,000
Fixed assets to sales	135.14%
Current Liabilities	910
Current Liabilities to sales	24.59%
Proforma Income Statement
Sales (3,700 x 130%)	4,810
Costs (4,810 x 51.35%)	2,470
Taxable Income	2,340
Taxes @ 32%	749
Net Income	1,591
Calculation of Retained Earnings & Equity
Net Income	1,591
Dividend payout ratio	40%
Dividends (1,591 x 40%)	636
Retained Earnings (1,591 - 636)	955
Equity (opening)	5,380
Total Equity	6,335
Proforma Balance Sheet
Current Assets	6,370	Current Liabilities	1,183
(4,810 x 132.43%)		(4,810 x 24.59%)
Fixed Assets	6,500	Long-Term Debt	3,610
(4,810 x 135.14%)		Equity	6,335
Total Assets	12,870	Total Liabilities	11,128
The difference between total assets and liabilities implies the
requirement of external finance.
External finance required = 12,870 - 11,128 = $ 1,742