Question

The most recent financial information for Last in Line is: Sales $9,800 Costs 8,740 Net income 1,060 Assets 8,950 Debt 4,760 Equity 4,190 Assets and costs are proportional to sales. Debt and equity are not. A dividend of $371 was paid, and the company wishes to maintain a constant payout ratio. Next year's sales are projected to be $10,584. What is the amount of the external financing need?

Answer 1

To calculate the external financing need for Last in Line, we need to determine the changes in assets, costs, debt, and equity based on the projected increase in sales. By using the current and projected sales data, we can calculate the changes in these variables and sum them up to find the external financing need.

Step-by-step explanation:

To calculate the external financing need, we need to determine the change in assets, costs, debt, and equity based on the projected increase in sales. Given that assets and costs are proportional to sales, we can use the current sales and projected sales to find the change in assets and costs.

Similarly, we can determine the change in equity by subtracting the dividend paid from the net income. Finally, the change in debt is calculated by subtracting the change in equity from the change in assets. Adding all these changes together gives us the external financing need.

Here's the calculation:

1. Current sales: $9,800
2. Projected sales: $10,584
3. Change in assets: $10,584 - $9,800 = $784
4. Change in costs: $784
5. Change in equity: Net income - Dividend = $1,060 - $371 = $689
6. Change in debt: Change in assets - Change in equity = $784 - $689 = $95
7. External Financing Need: Change in debt = $95