The most recent financial statements for Assouad, Inc., are shown here: Assets,
ID: 2818622 • Letter: T
Question
The most recent financial statements for Assouad, Inc., are shown here:
Assets, costs, and current liabilities are proportional to sales. Long-term debt and equity are not. The company maintains a constant 45 percent dividend payout ratio. As with every other firm in its industry, next year’s sales are projected to increase by exactly 16 percent.
What is the external financing needed? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
The most recent financial statements for Assouad, Inc., are shown here:
Explanation / Answer
Next year, sales are expected to increase by 16%. Assets, costs and current liabilities are proportional to sales. So they will also increase by 16% each.
Forecasted Sales = 8,500 * (1 + 16%) = $9,860
Forecasted Cost = 5,950 * (1 + 16%) = $6,902
Forecasted taxable income = $9,860 - $6,902 = $2,958
Tax @ 22% = $650.76
Net Income = $2,958 - $650.76 = $2,307.24
Dividend Payout = 45% * $2,307.24 = $1,038.26
Hence Retained earnings increase = Net Income - Dividend Paid = $1,268.98
Total Assets Forecasted = 12,350 * (1 + 16%) = $14,326
Total Current Liabilities Forecasted = 2,325 * (1 + 16%) = $2,697
Total Assets = Total Equity + Long term debt + Current Liabilities
14,326 = Total Equity + Long-term debt + 2,697
Total Equity + Long-term debt = $11,629
Existing Total debt + Equity = 3910 + 6115 = $10,025
Change = 11,629 - 10,025 = $1,604
Out of this $1,268.98 comes from retained earnings and remaining is the external financing needed.
External fincning required = $1,604 - $1,268.98 = $335.02
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