The 2017 financial statements for Growth Industries are presented below. Sales a
ID: 2539212 • Letter: T
Question
The 2017 financial statements for Growth Industries are presented below.
Sales and costs are projected to grow at 20% a year for at least the next 4 years. Both current assets and accounts payable are projected to rise in proportion to sales. The firm is currently operating at 75% capacity, so it plans to increase fixed assets in proportion to sales. Interest expense will equal 10% of long-term debt outstanding at the start of the year. The firm will maintain a dividend payout ratio of 0.50.
What is the required external financing over the next year? (Negative amounts should be indicated by a minus sign.)
INCOME STATEMENT, 2017 Sales $ 210,000 Costs 155,000 EBIT $ 55,000 Interest expense 11,000 Taxable income $ 44,000 Taxes (at 35%) 15,400 Net income $ 28,600 Dividends $ 14,300 Addition to retained earnings 14,300 The 2017 financlal statements for Growth Industries are presented below. INCOME STATEMENT, 2817 Sales Costs EBIT Interest expense Taxable income Taxes (at 35%) Net income $ 218,e80 155,888 $55,808 11,800 $ 44,988 15,480 $ 28,680 polnts 14,388 14,388 Dividends Addition to retained earnings Assets Liabilities Current assets Current liabilities $ 4,880 Cash Accounts receivable Inventories 9,808 278 Long-term debt 48,88 Stockholders' equity Accounts payable Total current 1iabilities 11,800 $ 11,800 118,800 Total current assets 158: 868Comon st $ 198,898 Total liabilities and stockholders equity Net plant and equipnent Conmon stock plus additional paid-in capital Retained earnings 15,880 54,808 $ 198,808 Total assets Sales and costs are projected to grow at 20% a year for at least the next 4 years. Both current assets and accounts payable are projected to rise in proportion to sales. The firm Is currently operating at 75% capacity, so it plans to increase fixed assets In proportion to sales. Interest expense will equal 10% of long-term debt outstanding at the start of the year. The firm will maintain a dMdend payout ratlo of 0.50. What Is the requlred external financing over the next year? (Negative amounts should be Indicated by a minus sign.) Answer is complete but not entirely correct. External (17,925)Explanation / Answer
Even if sales increase by 20%, the firm still has more than enough fixed assets to meet production. Only working capital will increase. Net working capital of the firm in 2015 was $29,000 (40000- 11000). The increase in net working capital will be $4060 (29000 * 0.20 * 0.70), which is less than the increase in the retained earnings. Thus required external financing is $-13,815. A negative external financing value indicates the firm will generate more cash than it needs to finance the projected growth. This extra cash can be used to reduce debt, repurchase shares, increase cash reserves, or fund future growth. This extra cash was primarily due to the firm's excess production capacity.
INCOME STATEMENT Sales $ 252,000 Costs 186,000 EBIT $ 66,000 Interest expense 11,000 Taxable income $ 55,000 Taxes (at 35%) 19,250 Net income $ 35,750 Dividends $ 17,875 Addition to retained earnings 17,875Related Questions
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