The 2017 financial statements for Growth Industries are presented below. INCOME
ID: 2799048 • Letter: T
Question
The 2017 financial statements for Growth Industries are presented below. INCOME STATEMENT,2017 Sales Costs EBIT Interest expense Taxable incone Taxes (at :351 Net income $ 280,000 190,000 90,000 22,000 $ 46,800 Dividendas Addition to retained earninga 23,400 HALANCE SHEET, TEAR-END, 2017 Liabilities current liabilities current assets Cash Accounta zeceivable Inventories 4,000Accounta payable ,000 5 11,00D 80,000 Total current liabilities 37,000 Long-tern debt 0,000Stockhoiders equity Cormoe stock plus additional paid-in eapital15,000 Retaibed eaenings Total current asseta Net plant and equipnent s 270,000 otal liabilitiea and stockholdecs' equsey 5270,000 total anROLS projected to rise in proportion to sales The firm is currently operating at 70% capacity, so t plans to increase iind assets in ooportion to sales interest expense will equal 10% of long-term debt outstanding at the start of the year The firm wil an an a dividend payout ratio of 0.50 Sales and costs are projected to grow at 40% a year for at least the next 4 years. Both current assets and accounts payable are What is the required external financing over the next year? (Negative amounts should be indicated by a minus sign) Extornal financngExplanation / Answer
Net Working Capital in 2017 =Current Assets - Current Liabilities =$50,000 -11,000 =$39,000
Change in Net Working Capital in 2018 =$39,000 x 0.40 =$15,600
Interest Expenses on Long Term Debt in 2018 =0.10x180,000 =$18,000
Net Income in 2018 ={1.40x90,000 - 18,000}x(1-0.35) =108,000x0.65 =$70,200
Dividend Ratio =0.50
Thus, retained earnings in 2018 =(1-0.50)x70,200 =$35,100
Since, the additional working capital required in 2018 is less than the retained earnings, external financing need will be negative i.e. the firm will generate more cash than required for working capital.
External Financing =$15,600 - 35,100 =$ -19,500
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