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

Projected Income statement 2013 Sales (1150*1.2) 1380 Less: Costs(220*1.2) 264 Interest 30 EBT 1086 Tax at 18.89% 205 Net Income 881 Interest expense is not proportional eo sales. Hence same figure retained. As interest expense were included in the 2012 Income statement, Profit Margin is not calculated.Instead,retained earnings figure obtained from 2013 net income. a. EFN=Increase in assets-Inc. in liabilities-Inc.in Retained Earnings EFN=(3500*20%)-(1500*20%)-(881*(1-70%)) 135.7 b-1. Debt b-2. Value= 135.7 c. Now the EFN is projected to be 135.7 But increase in long-term debt is only upto $ 100, then dividend payment is calculated as follows: Using the above equation,keeping the EFN as 135.7 , increase in debt as (1600-1500)= 100 & solving for D= dividends --with the same profits, 135.7=(3500*20%)-(100)-(881*(1-D%)) 47.30% Dividend payment will be 47.30% & the balance of $ 881 will be retained in the business to fund the 20% growth.

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