Question

For the next fiscal year, you forecast net income of $50,800 and ending assets of $503,500. Your firm's payout ratio is 10.3%. Your beginning stockholders' equity is $296,700 and your beginning total liabilities are $119,600. Your non-debt liabilities such as accounts payable are forecasted to increase by $9,800. Assume your beginning debt is $105,100. What amount of equity and what amount of debt would you need to issue to cover the net new financing in order to keep your debt-equity ratio constant? The Tax Cuts and Jobs Act of 2017 temporarily allows 100% bonus depreciation (effectively expensing capital expenditures). However, we will still include depreciation forecasting in this chapter and in these problems in anticipation of the return of standard depreciation practices during your career. The amount of equity to issue will be $ (Round to the nearest dollar.) The amount of debt to issue will be $ (Round to the nearest dollar.)

Answer 1

Here while calculating the debt to equity ratio we have taken total external debt and not just long term debt

Net income Pay out ratio 50,800.00 10.30% Increase in retained earning 50800*(1-0.103) 45,567.60 Liabilities Liability (beginning) increase in retained earning beginning equity 119,600.00 45,567.60 296,700.00 beginning debt 105,100.00 Short term liabilities New Existing 9,800.00 14,500.00 (119600-105100) Total liability ending 471,667.60 (45567.6+296700+105100+9800+14500) since you forecast total ensing asset of 503500 So incremental = (503500-471667.5) 31,832.50 Debt to equity ratio before change = (tTotal external debt/equity +retained earnings (105100+9800+14500)/(296700+45567.6) 0.3781 The amount of debt issue (0.3781*31832.5)*(1/(1+0.3781)) 8,733.67 The amount of equity (31832.5-8733.67) 23,098.83