The 2017 financial statements for Growth Industries are presented below. Sales a

Question

The 2017 financial statements for Growth Industries are presented below.

Sales and costs are projected to grow at 20% a year for at least the next 4 years. Both current assets and accounts payable are projected to rise in proportion to sales. The firm is currently operating at 75% capacity, so it plans to increase fixed assets in proportion to sales. Interest expense will equal 10% of long-term debt outstanding at the start of the year. The firm will maintain a dividend payout ratio of 0.50.

What is the required external financing over the next year? (Negative amounts should be indicated by a minus sign.)

INCOME STATEMENT, 2017 Sales $ 320,000 Costs 210,000 EBIT $ 110,000 Interest expense 22,000 Taxable income $ 88,000 Taxes (at 35%) 30,800 Net income $ 57,200 Dividends $ 28,600 Addition to retained earnings 28,600

Explanation / Answer

Growth Industries

Pro Forma Income Statement

For the year ended 2018

Pro Forma Balance Sheet

2018 Year End

Required external financing next year = Increase in long term debt = $ 245,250 - $ 220,000 = $ 25,250.

$ Sales 384,000 Costs 252,000 EBIT 132,000 Interest Expense 22,000 Taxable Income 110,000 Taxes ( 35%) 38,500 Net Income 71,500 Dividends 35,750 Addition to Retained Earnings 35,750

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