The most recent financial statements for Cardinal, Inc., are shown here: Income

Question

The most recent financial statements for Cardinal, Inc., are shown here: Income Statement Sales Balance Sheet $27,800 Assets $66,800 Debt 31,100 Equity 35,700 Taxable $9,800 $66,800 Total $66,800 Taxes (22%) 2156 Net income $ 7,644 Assets and costs are proportional to sales. Debt and equity are not. A dividend of $2,900 was paid, and the company wishes to maintain a constant payout ratio. Next year's sales are projected to be $33,360. What is the external financing needed? (Do not round intermediate calculations.) External financing needed

Explanation / Answer

External financing needed = $7667.36 (Approx.)

Explanation;

1. First of all let’s calculate dividend payout ratio;

Net income = $7644

Dividend paid = $2900

Thus, dividend payout ratio ($2900 / $7644) = 37.94% (Approx.)    

2. Now let’s calculate net income for next year;

Next year sale is given = $33360

Current year sale is given = $27800

Thus increase rate ($33360 / $27800) = 1.2 times

Net income of current year is = $7644

Thus net income of next year will be ($7644 * 1.2) = $9172.80

3. Let’s calculate retained earnings for next year;

Retained earnings = Net income – Dividend

Retained earnings $9172.80 * (100% – 37.94%)

Retained earnings = $5692.64

4. Now let’s calculate external financing needed;

Balance Sheet (For Next year)

Assets ($66800 * 1.2)

$80160

Debt

$31100

Equity

$35700

Retained earnings

$5692.64

External financing needed

$7667.36

$80160

$80160

Balance Sheet (For Next year)

Assets ($66800 * 1.2)

$80160

Debt

$31100

Equity

$35700

Retained earnings

$5692.64

External financing needed

$7667.36

$80160

$80160

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