The most recent financial statements for Moose Tours, Inc., appear below. Sales

Question

The most recent financial statements for Moose Tours, Inc., appear below. Sales for 2016 are projected to grow by 20 percent. Interest expense will remain constant; the tax rate and the dividend payout rate will also remain constant. Costs, other expenses, current assets, fixed assets, and accounts payable increase spontaneously with sales.

If the firm is operating at full capacity and no new debt or equity is issued, what external financing is needed to support the 20 percent growth rate in sales? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)

The most recent financial statements for Moose Tours, Inc., appear below. Sales for 2016 are projected to grow by 20 percent. Interest expense will remain constant; the tax rate and the dividend payout rate will also remain constant. Costs, other expenses, current assets, fixed assets, and accounts payable increase spontaneously with sales.

Explanation / Answer

Answer:

Additional Fund Needed = Projected Increase in Assets – Spontaneous Increase in Liabilities – Increase in Retained Earnings

Projected Increase in Assets = Assets * Sales Growth Rate
Projected Increase in Assets = $388,020 * 0.20 = $77,604

Spontaneous Increase in Liabilities = Liabilities * Sales Growth Rate
Spontaneous Increase in Liabilities = $56,300* 0.20 = $11,260

Increase in Retained Earning = Expected Sales * Profit Margin * Retention Rate
Profit Margin Rate = Net Income / Sales * 100
Profit Margin Rate = 67,800 / 740,000 * 100
Profit Margin Rate = 9.16%

Retention Rate = 1 - Dividend Payout Ratio
Dividend Payout Ratio = Dividend / Net Income * 100
Dividend Payout Ratio = 32,400 / 67,800 * 100 = 47.79%
Retention Rate = 1 – 0.4779 = 0.5221or 52.21%

Expected Sales = $740,000 * 20% = $888,000
Increase in Retained Earning = $888,000 * 9.16% * 52.21%
Increase in Retained Earning = $42,468.03

Additional Fund Needed = $77,604 - $11,260 - $42,468.03
Additional Fund Needed = $23,875.97 or $23,876

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