The following are the first stage and second stage pro forma financial statement
ID: 2772887 • Letter: T
Question
The following are the first stage and second stage pro forma financial statements of Executive Fruit Company for the year ended December 2015.
How would Executive Fruit’s financial model change if the dividend payout ratio were cut to 1/3? Use the revised model to generate a new financial plan for 2015 assuming that debt is the balancing item. What would be the required external financing? (Do not round intermediate calculations.)
Dividends fall by $______________ . Therefore, the requirement for external financing falls from $_____________ to $_________________ . On the other hand, shareholders' equity will be increased by $________________ .
The right-hand side of the balance sheet becomes (Do not round intermediate calculations. Enter your answers in thousands.):
The following is the financial statement of Executive Fruit Company for the year ended December 2014.Explanation / Answer
Dividend Payout Ratio, DPR = Dividend Paid / Net Income
Current DPR = $208,000 / $312,000 = 0.67
Proposed DPR in 2015 = 1/3 = 0.33
Projected Net Income, 2015 = $351,000
So, proposed dividend = Projected net income x DPR = $351,000 x (1/3) = $117,000
Transfer to retained earnings = $351,000 - $117,000 = $234,000
So, revised shareholder equity = $(2,067,000 - 117,000 + 234,000) = $2,184,000
The revised balance sheet will be as follows:
So,
Dividend falls by $(234,000 - 117,000) = $117,000. Requirement for external financing falls from $208,000 to $91,000.
Shareholders equity will be increased by $(2,184,000 - 2,067,000) = $117,000
ASSETS $'000 Net Working Capital 715 Fixed Assets 2,860 Total Asets 3,575 Liability & Equity Long term debt (Balancing Figure) 1,300 Shareholder equity 2,184 Total liability & Shareholders Equity 3,484 Required external funding 91Related Questions
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