Question

The most recent financial statements for Assouad, Inc., are shown here: Income Statement Balance Sheet Sales $3,900 Current assets $4,700 Current liabilities $860 Costs 1,900 Fixed assets 4,700 Long-term debt 3,610 Taxable income $2,000 Equity 4,930 Taxes (22%) 440 Total $9,400 Total $9,400 Net income $1,560 Assets, costs, and current liabilities are proportional to sales. Long-term debt and equity are not. The company maintains a constant 50 percent dividend payout ratio. As with every other firm in its industry, next year's sales are projected to increase by exactly 20 percent. What is the external financing needed?

Answer 1

$2,896 is needed

Step-by-step explanation:

external financing needed = net income - working capital needs - capital expenditures + retained earnings

• net income = $1,560 x 1.2 = $1,872
• working capital needs = ($4,700 x 1.2) - ($860 x 1.2) = $5,640 - $1,032 = $4,608
• capital expenditures = fixed assets x 20% = $940
• retained earnings = $1,560 x 50% = $780

external financing needed = $1,872 - $4,608 - $940 + $780 = -$2,896