Question

Problem 3-21 Calculating EFN

The most recent financial statements for Scott, Inc., appear below. Sales for 2020 are projected to grow by 30 percent. Interest expense will remain constant; the tax rate and the dividend payout rate also will remain constant. Costs, other expenses, current assets, fixed assets, and accounts payable increase spontaneously with sales.

SCOTT, INC. 2019 Income Statement
Sales				$	746,000
Costs					581,000
Other expenses					17,000
Earnings before interest and taxes				$	148,000
Interest expense					13,000
Taxable income				$	135,000
Taxes (23%)					31,050
Net income				$	103,950
Dividends	$	31,185
Addition to retained earnings		72,765

SCOTT, INC. Balance Sheet as of December 31, 2019
Assets				Liabilities and Owners’ Equity
Current assets				Current liabilities
Cash	$	20,540		Accounts payable	$	54,700
Accounts receivable		43,480		Notes payable		13,900
Inventory		90,960		Total	$	68,600
Total	$	154,980		Long-term debt	$	129,000
Fixed assets				Owners’ equity
Net plant and equipment	$	422,000		Common stock and paid-in surplus	$	114,000
				Retained earnings		265,380
				Total	$	379,380
Total assets	$	576,980		Total liabilities and owners’ equity	$	576,980

If the firm is operating at full capacity and no new debt or equity is issued, what external financing is needed to support the 30 percent growth rate in sales? (Do not round intermediate calculations.)

Answer 1

Scott Inc.

Projected Income Statement for 2020:

Particulars	Workings	Amount ($)
Sales	746000*130%	969800
Costs	581000*130%	755300
Other Expenses	17000*130%	22100
Earnings before Interest and Taxes		192400
Interest Expense		13000
Earnings before Tax/ Taxable Income		179400
Taxes (@23%)	179400*23%	41262
Net Income		138138
Dividend	138138*30%	41441.40
Addition to retained Earnings		96696.60

Note:

Dividend Payout = Dividend Paid/Net Income

= 31185/ 103950 = 0.30 i.e. 30%

As given in the question, dividend payout ratio will remain constant.

So, Dividend payout for 2020= 30%

SCOTT, INC.
Projected Balance Sheet as of December 31, 2020

Assets	Workings	Amount ($)	Liabilities and Owners Equity	Workings	Amount ($)
Current Assets			Current Liabilities
Cash	20540*130%	26702	Accounts Payable	54700*130%	71110
Accounts Receivable	43480*130%	56524	Notes Payable (Balancing figure)		73887.40
Inventory	90960*130%	118248
Total		201474	Total
			Long Term Debt		129000
			Owners' Equity
Fixed Assets			Common Stock and paid in Surplus		114000
Net plant and equipment	422000*130%	548600	Retained Earnings	265380.00
			Add: Additions during the year	96696.60	362076.60
Total Assets		750074	Total Liabilities		750074

As given in the problem, the firm is operating at full capacity and no new debt or equity is issued; hence, the external financing that is needed to support the 30% growth in sales is issuing notes payable.

Notes payable already existing= $ 13900

Notes payable as per Balance sheet (computed as a balancing figure)= $ 73887.40

Fresh financing needed= $ (73887.40 - 13900)

= $ 59987.40.

Note: We have assumed that the notes payable are interest free.