Question

The most recent financial statements for ABC Inc., follow. Sales for next year are projected to grow by 20 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.

ABC, INC.
Income Statement
Sales	$	582,391
Costs		508,983
Other expenses		19,721
Earnings before interest and taxes	$	?
Interest paid		12,109
Taxable income	$	?
Taxes (30%)		?
Net income		?
Dividends	$	7,490

ABC, INC.
Balance Sheet
Assets				Liabilities and Owners’ Equity
Current assets				Current liabilities
Cash	$	20,893		Accounts payable	$	59,751
Accounts receivable		35,416		Notes payable		17,531
Inventory		73,142
				Long-term debt	$	117,736
Fixed assets
Net plant and equipment	$	409,578		Owners’ equity
				Common stock and paid-in surplus	$	130,657
				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 20 percent growth rate in sales?

Answer 1

ABC Inc Proforma Income Statement Current Forecast Sales $582,391 $698,869 20% increase Cost $508,983 $610,780 20% increase Other expense $19,721 $23,665 20% increase EBIT $53,687 $64,424 Interest $12,109 $12,109 Taxable income $41,578 $52,315 Taxes at 30% $12,473 $15,695 Net Income $29,105 $36,621 Dividend Addition to RE $7,490 $9,424 $21,615 $27,197 Dividend payout ratio = $7,490/$29,105 = 25.73% Amount of External funds needed Current Forecast Cash $20,893 $25,072 20% increase Accounts receivable $35,416 $42,499 20% increase Inventory $73,142 $87,770 20% increase Fixed Assets $409,578 $491,494 20% increase Total assets $539,029 $646,835 Accounts payable Notes payable Long-term debt Equity Retained earnings Total liabilities & Equity $59,751 $71,701 20% increase $17,531 $17,531 $117,736 $117,736 $130,657 $130,657 $213,354 $240,551 Addition of RE $539,029 $578,176 Answer External funds needed $68,659 (Total assets-Total Liabilities & equity)