Sales and costs in 2016 are projected to be 20% higher than in 2015. Both curren

Question

Sales and costs in 2016 are projected to be 20% higher than in 2015. Both current assets and accounts payable are projected to rise in proportion to sales. The fixed assets of Growth Industries are operating at only 75% of capacity. Interest expense in 2016 will equal 10% of long-term debt outstanding at the start of the year. The firm will maintain a dividend payout ratio of .50.

What is the required external financing over the next year?

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 $. The increase in net working capital will be $, which is less than the increase in the retained earnings. Thus required external financing is $. 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.

Explanation / Answer

Growth Industries All Amounts in $ PROJECTED INCOME STATEMENT, 2016   Sales $ 384000   Costs 252000   EBIT $ 132000   Interest expense 22000   Taxable income $ 110000   Taxes (at 35%) 38500   Net income $ 71500     Dividends 35750     Addition to retained earnings 35750 BALANCE SHEET, YEAR-END, 2016 (PROJECTED) Assets Liabilities   Current assets % of Sales   Current liabilities % of Sales     Cash $ 9600 2.50%     Accounts payable $ 18000 4.69%     Accounts receivable 15600 4.06%     Total current liabilities $ 18000     Inventories 46800 12.19%   Long-term debt 279917       Total current assets $ 72000   Stockholders’ equity   Net plant and equipment 346667     Common stock plus additional paid-in capital 15000     Retained earnings 105750   Total assets $ 418667   Total liabilities and stockholders’ equity $ 418667 Assuming that fixed assets operate at 100% of capacity, and thus the value thereof increases, the required additional external financing will be $ 279,917 - $ 220,000 = $ 59,917.

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