Question

The most recent financial statements for Cardinal, Inc., are shown here:

Income Statement				Balance Sheet
Sales	$	33,000		Assets	$	77,200		Debt	$	40,200
Costs		18,650						Equity		37,000
Taxable income	$	14,350		Total	$	77,200		Total	$	77,200
Taxes (24%)		3,444
Net income	$	10,906

Assets and costs are proportional to sales. Debt and equity are not. A dividend of $4,200 was paid, and the company wishes to maintain a constant payout ratio. Next year’s sales are projected to be $37,950.

What is the external financing needed? (Do not round intermediate calculations.)

Answer 1

Dividend payout ratio=Dividend/Net income

=(4200/10906)=0.385109114

Growth rate in sales=(37950-33000)/33000=15%

Sales	37950
Costs(18650*1.15)	21447.5
Taxable income	16502.5
Taxes(16502.5*24%)	3960.6
Net income	$12541.9
Less:Dividends($12541.9*0.385109114)	4830
Addition to retained earnings	$7711.9

Total assets would be=$77200*1.15=$88780

Total equity would be=$37000+Addition to retained earnings

=(37000+7711.9)=$44711.9

Total assets=Total equity+Total liabilities

Hence external financing needed=$88780-(44711.9+40200)

=$3868.1