Question

The most recent financial statements for Assouad, Inc., are shown here: Income Statement Balance Sheet Sales $ 11,100 Current assets $ 5,400 Current liabilities $ 3,300 Costs 7,900 Fixed assets 10,200 Long-term debt 4,820 Taxable income $ 3,200 Equity 7,480 Taxes (24%) 768 Total $ 15,600 Total $ 15,600 Net income $ 2,432 Assets, costs, and current liabilities are proportional to sales. Long-term debt and equity are not. The company maintains a constant 40 percent dividend payout ratio. As with every other firm in its industry, next year’s sales are projected to increase by exactly 17 percent. What is the external financing needed?

Answer 1

To calculate external financing needed for Assouad, Inc., we project next year's sales at a 17% increase and adjust balance sheet items proportionally. After projecting the balance sheet, we find a negative external financing needed of -$1,102.2, indicating that the firm does not need external financing and instead has surplus funds.

Step-by-step explanation:

To calculate the external financing needed for Assouad, Inc., we first forecast next year's sales and the associated changes in the balance sheet items that are proportional to sales.

With a 17% increase in sales, next year's sales will be $11,100 x 1.17 = $12,987. The current assets, costs, and current liabilities will also increase by 17%. Fixed assets, long-term debt, and equity will not change because they are not proportional to sales according to the information provided.

Next, we determine the new levels of current assets and liabilities. Current assets will be $5,400 x 1.17 = $6,318 and current liabilities will be $3,300 x 1.17 = $3,861. The increase in retained earnings is found by taking the net income after dividends, which is (1 - dividend payout ratio) x net income = (1 - 0.40) x $2,432 = $1,459.2.

Now, we can outline the projected balance sheet for the next year:

• Current assets: $6,318
• Fixed assets: $10,200 (unchanged)
• Total assets: Current assets + Fixed assets = $6,318 + $10,200 = $16,518
• Current liabilities: $3,861
• Long-term debt: $4,820 (unchanged)
• Equity: Existing equity + increase in retained earnings = $7,480 + $1,459.2 = $8,939.2
• Total liabilities and equity: Current liabilities + Long-term debt + Equity = $3,861 + $4,820 + $8,939.2 = $17,620.2

The external financing needed (EFN) is the difference between the total projected assets and the total projected liabilities and equity. EFN = Total assets - Total liabilities and equity = $16,518 - $17,620.2 = -$1,102.2. A negative EFN suggests that the firm does not need external financing and has an excess of funds.

Answer 2

EXTERNAL FINANCING NEEDED IS $383.736

Step-by-step explanation:

For calculating the external financing , we first have to take out what the sales , cost , asset , liability will be when the sales of the company increases by 17%, so now we have to calculate all the values -

SALES = $11,100 X 1.17 ( multiplying by 17% because of increase in sale)

= $12,987

COST = $7900 X 1.17 (multiplying by 17%)

= $9243

INCOME BEFORE TAX = SALES - COST

= $12,987 - $9243

= $3744

TAXES AT 24% ON TAXABLE INCOME OF $3744

= .24 X $3744 =$ 898.56

Now subtracting this amount from taxable income

$3744 - $898.56 = $2,845.44

Next step would be of paying dividend payout ratio from it

40% of $2,845.44 = .40 x $2845.44

= $1138.176

RETAINED EARNINGS = Taxable income - Dividend payout

= $2845.44 - $1138.176

= $1707.264

NOW TOTAL ASSETS WOULD BE = $15,600(5400+10200) X 1.17

= $18,252

IT IS GIVEN IN THE QUESTION THAT COST, ASSET, LIABILITY(CURRENT) ARE ALL PROPORTIONAL TO SALES.

CURRENT LIABILITY = $3300 X 1.17

= $3861

TOTAL COST = LONG TERM LIABILITY + CURRENT LIABILITY

=$4820 + $3861

= $8681

TOTAL EQUITY EQUAL = $7480 + $1707.264 (RETAINED EARNINGS)

= $9187.264

EXTERNAL FINANCING = ASSET - LIABILITY - EQUITY

= $18,252 - $8681 - $9187.264

= $383.736