Question

The most recent financial statements for Fleury Inc., follow. Sales for next year are projected to grow by 22 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.

FLEURY, INC.
Income Statement
Sales	$	572,274
Costs		504,110
Other expenses		16,373
Earnings before interest and taxes	$	?
Interest paid		13,013
Taxable income	$	?
Taxes (30%)		?
Net income		?
Dividends	$	6,512

FLEURY, INC.
Balance Sheet
Assets				Liabilities and Owners’ Equity
Current assets				Current liabilities
Cash	$	20,442		Accounts payable	$	50,825
Accounts receivable		37,505		Notes payable		15,612
Inventory		71,739
				Long-term debt	$	107,612
Fixed assets
Net plant and equipment	$	409,239		Owners’ equity
				Common stock and paid-in surplus	$	124,119
				Retained earnings		?

If the firm is operating at full capacity and no new debt or equity is issued, what external financing is needed to support the 22 percent growth rate in sales?

Answer 1

FLEURY, INC.
Income Statement
Sales	572,274
Less: Costs	504,110
Less: Other expenses	16,373
Earnings before interest and taxes	51,791
Less: Interest paid	13,013
Taxable income	51,791
Less: Taxes (30%)	15,537
Net income	36,254
Dividends	6,512
dividend payout rate (6512/36254)	17.9621559%

FLEURY, INC.
Balance Sheet
Assets		Liabilities and Owners’ Equity
Current assets		Current liabilities
Cash	20,442	Accounts payable	50,825
Accounts receivable	37,505	Notes payable	15,612
Inventory	71,739	Long-term debt	107,612
Total current assets	129,686	Owners’ equity
Fixed assets		Common stock and paid-in surplus	124,119
Net plant and equipment	409,239	Retained earnings (Balancing figure) (538925-(50825+15612+107612+124119))	240,757
Total assets	538,925	Total Liabilities and Owners’ Equity	538,925

FLEURY, INC. (22% growth = 1+ 22% = 1.22)
Expected Income Statement (for next year)
Sales (572274*1.22)	698,174
Less: Costs (504110*1.22)	615,014
Less: Other expenses (16373*1.22)	19,975
Earnings before interest and taxes	63,185
Less: Interest paid (same as last year)	13,013
Taxable income	63,185
Less: Taxes (30%) (63185*30%)	18,956
Net income	44,230
Multiply: dividend payout rate	17.9621559%
Dividend paid	7,945
Increase in retained earnings (44230-7945)	36,285
Increase in current assets (129686*22%)	28,531
Increase in fixed assets (409239*22%)	90,033
Increase in total assets	118,564
Less: increase in accounts payable (50825*22%)	11,182
Total financing required	107,382
Less: Increase in retained earnings	36,285
External financing needed	71,097