Question

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

Income Statement Balance Sheet
Sales $22,100 Assets $108,000 Debt $42,600
Costs 17,400 Equity 65,400
Taxable
income $4,700 Total $108,000 Total $108,000

Taxes (21%) 987
Net income $3,713

Assets and costs are proportional to sales. Debt and equity are not. A dividend of $1,530 was paid, and the company wishes to maintain a constant payout ratio. Next year's sales are projected to be $29,400. What is the external financing needed?

Answer 1

$33,137

Step-by-step explanation:

The computation of the external financing need is shown below:

But before that the following calculations need to be required:

Projected assets = Projected sales × Assets ÷ Sales ratio

= $29,400 × $108,000 ÷ $22,100

= $143,674

Projected cost = Projected sales × cost ÷ sales ratio

= $29,400 × $17,400 ÷ $22,100

= $23,147

The projected net income = (Projected sales - projected cost) × ( 1 - tax rate)

= ($29,400 - $23,147) × (1 - 0.21)

= $4,315

The current dividend payout ratio = Dividend ÷ Net income

= $1,530 ÷ $3,713

= 41.21%

The projected dividend = Projected net income × dividend payout ratio

= $4,315 × 41.21%

= $1,778

Projected equity = Equity + projected net income - projected dividend

= $65,400 + $4,315 - $1,778

= $67,937

Projected debt = Projected assets - projected equity

= $143,674 - $67,937

= $75,737

Now the external financing debt is

= Projected debt - debt

= $75,737 - $42,600

= $33,137