Bassrim, Inc. has the financial profile illustrated below. Margins (%) will hold

Question

Bassrim, Inc. has the financial profile illustrated below. Margins (%) will hold steady, and Assets grow proportionally with Sales. Debt and Equity are set independently. Bassrim intends to maintain a constant dividend payout ratio (dividend as a percent of Net Income). Next year’s sales are projected to increase by 11%. How much additional capital (debt or equity or both) will be required to support the growth in assets? Question 5 25 Points Glenturn expects the following year-end results: Income Statement Balance Sheet Sales 323,099 $ Assets 613,500 $ Debt 204,440 $ Costs 239,543 Equity 409,060 Taxable income 83,556 $ Total 613,500 $ Total 613,500 $ Taxes (34%) 28,409 Net income 55,147 $ Tax rate 34% Dividend paid 23,700 $ Glenturn, Inc. 2016 Expected Sales 169,410,000 $ COGS 123,669,300 Other expenses 28,994,000 Depreciation 5,060,000 EBIT 11,686,700 $ Interest expense 3,509,000 Taxable income 8,177,700 $ Taxes (35%) 2,862,195 Tax rate 35% Net income 5,315,505 $ Dividends 3,720,854 $ Payout 70% Add to RE 1,594,652 $ Current Assets Current liabilities Cash 3,142,000 $ Accounts payable 8,572,000 $ Accounts rec. 15,502,000 Short-term Debt 12,579,000 Inventory 10,196,000 Total CL 21,151,000 $ Total CA 28,840,000 $ Long-term debt 44,135,000 $ Fixed assets Net PP&E 95,944,000 $ Shareholder equity Paid-In Capital 5,350,000 $ Retained earnings 54,148,000 Total equity 59,498,000 $ Total assets 124,784,000 $ Total L&E 124,784,000

Explanation / Answer

Total growth in assets will be 11% as sales is to grow by 11%. First, the addtional required funds will be funded by retained earnings and rest of the amount will be funded by debt or equity.

Now, suppose Sales is S, Margin % is N to sales and retained earnings are R%

So, additional funds required = (0.11*S) - (N*R)

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