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 Sales Costs Interest Taxes INCOME STATEMENT, 2012 $1,150 220 30 170 Net income $ 730 BALANCE SHEET, YEAR-END 2011 2012 2012 $1,400 $1,500 1,800 2,000 2011 Assets $3,200 $3,500 Debt Equity Total $ 3,200$3,500 Total $3,200 $3,500 a. Find Eagle's required external funds if it maintains a dividend payout ratio of 70% and plans a growth rate of 20% in 2013" (Do not round intermediate calculations. Round your answer to 2 decimal places.) External fund b-1 If Eagle chooses not to issue new shares of stock, what variable must be the balancing item? Debt Interest Dividends b-2 What will its value be? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Value c. Now suppose that the firm plans instead to increase long-term debt only to $1,600 and does not wish to issue any new shares of stock. What will be the value of dividend payment now? Value

Explanation / Answer

a) Growth Rate Planned = 20%

This means that Eagle's Top line would grow by 20% to a value of $1380 in 2013

1150 * 1.2 = 1380

Since Assets are proportional to the company's sales, Assets should also grow at the same rate i.e. 20%

3500 * 1.2 = 4200

Net Asstes in 2013 = $4200

In 2012

Debt = 1500, Equity = 2000 = Common Stock + Retained Earnings

Retained Earnings = 730 - Dividends = 730 - 0.7*730 = 219 ( Dividend Payout ratio = 70%)

Common Stock 2012 = 2000 - 219 = 1781

In 2013

Debt + Equity = 4200 = Assets

Retained Earnings 2013 = 1.2 * 730 - (.7 * 1.2 * 730) = 262.8

Increase In Retained Earnings = 43.8

External Funds Required = Increase in Assets - Increase in Retained Earnings = 700 - 43.8 = $ 656.2

b1) Debt should be the variable in this case as Common stock in cosidered to be constant and so is the case with retained Earnings

b2) As calculated in the first part the value should be equal to the exyernal funds required i.e. $ 656.2

c) Increase in Assets = 700, Increase in Debt = 100, Increase in Common Stock = 0

Increase in Retained Earnings should balance the Accounting Equation and it should be $ 600

New Retained Earnings = 219 + 600 = $819

Profit in 2013 = 1.2 * 730 = $876

Hence dividend in 2013 should be = 876 - 819 = $ 57

Related Questions

Navigate

• Browse (All)
• Browse E
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.