In 2016. Company ABC reported revenue of $16,000,000, net income of $800,000 and

Question

In 2016. Company ABC reported revenue of $16,000,000, net income of $800,000 and dividends of $400,000. ABC expects that revenues will increase to $20,000,000 in 2017. The net margin ratio (net income/revenue) and the dividend payout ratio (dividends/net income) in 2016 will not change in 2017 (you can use the 2016 ratios to answer the questions below). In 2016, ABC’s Total assets consisted of marketable securities of $2,000,000, accounts receivable of $8,000,000, and equipment of $2,000,000 (which was at 80% capacity). Total liabilities consisted of accounts payable of $1,000,000, short-term notes payable of $1,000,000, and long-term debt of $2,000,000. Owner’s Equity was $8,000,000, and consisted of common stock of $4,000,000 and retained earnings of $4,000,000. Calculate the following for 2017: Addition to Retained Earnings (ADRE), Current Assets, Current Liabilities, Owner’s Equity, and External Financing Needed (EFN).

Explanation / Answer

2016 2017 Revenue 16000000 +25% 20000000 Net income 800000 5.00% 1000000 Dividends 400000 50.00% 500000 Addition to retained earnings 400000 500000 ASSETS 2016 2017 Marketable securities 2000000 12.5% of sales 2500000 Accounts receivable 8000000 50.0% of sales 10000000 Total current assets 10000000 12500000 Equipment 2000000 no increase needed as the equipment is now operating only at 80% capacity 2000000 Total assets 12000000 14500000 LIABILITIES AND EQUITY Accounts payable 1000000 6.25% of sales 1250000 Short term notes payable 1000000 1000000 Total current liabilities 2000000 2250000 Long term debt 2000000 2000000 Total liabilities 4000000 4250000 Owner's equity: Common stock 4000000 4000000 Retained earnings 4000000 +500000 4500000 Total owner's equity 8000000 8500000 Total liabilities and equity 12000000 12750000 EFN 1750000

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