Question

ales $3,700 Current assets $4,500 Current liabilities $960 Costs 2,400 Fixed assets 5,200 Long-term debt 3,620 Taxable income $1,300 Equity 5,120 Taxes (21%) 273 Total $9,700 Total $9,700 Net income $1,027 Assets, costs, and current liabilities are proportional to sales. Long-term debt and equity are not. The company maintains a constant 60 percent dividend payout ratio. As with every other firm in its industry, next year's sales are projected to increase by exactly 30 percent. What is the external financing needed

Answer 1

$2,088

Step-by-step explanation:

Calculation to determine the external financing needed

First step is to calculate the Addition to retained earnings

Sales $4,810

($3700*1.30)

Costs $3,120

($2,400*1.30)

Taxable income $1,690

($4,810-$3,120)

Taxes $355

($1,690*21%)

Net income $1,335

($1,690-$355)

Less:Dividends $801

($1,335*60%)

Addition to retained earnings $534

($1,335-$801)

Second step is to calculate the Total assets

Total assets=$9,700*1.30

Total assets=$12,610

Third step is to calculate the Total equity

Total equity =5,120+Addition to retained earnings

Total equity=5,120+$534

Total equity=$5,654

Fourth step is to calculate Current liabilities

Current liabilities =$960*1.30

Current liabilities=$1,248

Fifth step is to calculate the Total liabilities

Total liabilities=Current liabilities+Long term debt

Total liabilities=$1,248+$3,620

Total liabilities=$4,868

Now let determine the External financing needed

Using this formula

External financing needed=Total assets-(Total equity+Total liabilities)

Let plug in the formula

External financing needed=$12,610-($5,654+$4,868)

External financing needed=$12,610-$10,522

External financing needed=$2,088

Therefore the external financing needed is $2,088