Eagle Sports Supply has the following financial statements. Assume that Eagle’s

Question

Eagle Sports Supply has the following financial statements. Assume that Eagle’s assets are proportional to its sales.

Find Eagle’s required external funds if it maintains a dividend payout ratio of 60% and plans a growth rate of 20% in 2016. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

If Eagle chooses not to issue new shares of stock, what variable must be the balancing item?

What value will appear on the adjusted balance sheet for the balancing variable? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Now suppose that the firm plans instead to increase long-term debt only to $900 and does not wish to issue any new shares of stock. What will be the value of dividend payment now? (Do not round intermediate calculations. Round your answer to the nearest whole number.)

Eagle Sports Supply has the following financial statements. Assume that Eagle’s assets are proportional to its sales.

Explanation / Answer

Eagle Sports Supply All Amounts in $ a. Projected Income Statement for 2016 INCOME STATEMENT, 2016   Sales $ 1,500   Cost 288   Interest 60   Taxes 228   Net income $ 924 With a dividend payout ratio of 60%, the transfer to retained earnings will be 40% of $ 924 = 369.6 Since assets are proportional to sales, the assets in 2016 will be 4440 With the equity value increasing by $ 369.6 to $ 3,269.60, the balancing figure which is the debt will be $ 1,170.40. Since Eagle already has debts worth $ 800, the required external financing for 2016 will be $ 370.40. b-1. In case Eagle decides not to issue new stock, the variable balancing item should be Debt only. b-2. The value of the debt appearing on the 2016 Balance Sheet will be $ 1,170.40. c. In case Eagle decides to issue only $ 900 worth of debt, capital which is the balancing figure will be $ 3,540. Since the net income is $ 924, and the original capital is $ 2,900, the amount which can be transferred to Retained Earnings is only $ 640. Thus, the amount of dividend payouts in 2016 will be $ 284.

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