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Sales and costs are projected to grow at 20% a year for at least the next 4 years. Both current assets and accounts payable are projected to rise in proportion to sales. The firm is currently operating at 75% capacity, so it plans to increase fixed assets in proportion to sales. Interest expense will equal 10% of long-term debt outstanding at the start of the year. The firm will maintain a dividend payout ratio of 0.40.

Required:
What is the required external financing over the next year?

Respuesta :

anthougo

Question Completion:

The 2017 financial statements for Growth Industries are presented below  

INCOME STATEMENT, 2017  

Sales $ 380,000  

Costs 240,000  

EBIT $ 140,000  

Interest expense 28,000  

Taxable income $ 112,000  

Taxes (at 35%) 39,200

Net income $ 72,800  

Dividends 21,840

Addition to retained earnings 50,960  

BALANCE SHEET, YEAR -END, 2017  

Assets    

Current assets  

Cash      $ 7,000      

Accounts receivable 12,000

Inventories 31,000

Total current assets $ 50,000  

Net plant and equipment 320,000

Total assets $ 370,000

Liabilities

Current liabilities

Accounts payable $ 14,000

Total current liabilities $14,000

Long-term debt Stockholders' equity 280,000

Common stock plus additional paid-in capital 15,000

Retained earnings 61,000  

Total liabilities and stockholders' equity $ 370,000

Answer:

Growth Industries

The required external financing over the next year is:

= $16,600.

Explanation:

a) Data and Calculations:

Sales and costs projected growth rates = 20%

Current assets and accounts payable growth rates = 20%

Fixed assets growth rates = 20%

Interest expense = 10% of long-term debt outstanding

Dividend payout ratio = 0.40

INCOME STATEMENTs,               2017        Projected

Sales                                      $ 380,000   $456,000 ($380,000 * 1.2)

Costs                                        240,000      288,000 ($240,000 * 1.2)

EBIT                                        $ 140,000    $168,000

Interest expense                       28,000        28,000

Taxable income                     $ 112,000    $140,000

Taxes (at 35%)                          39,200        49,000

Net income                            $ 72,800      $91,000

Dividends                                   21,840       36,400

Addition to retained earnings 50,960    $54,600

Retained earnings, 2017  $61,000

Projected addition             54,600

Retained earnings,         $115,600

BALANCE SHEET, YEAR -END, 2017  

Assets                                                                2017   Projected

Current assets  

Cash                                                               $ 7,000      $8,400 ($7,000*1.2)

Accounts receivable                                       12,000       14,400 (12,000*1.2)

Inventories                                                      31,000      37,200 (31,000*1.2)

Total current assets                                   $ 50,000   $60,000

Net plant and equipment                           320,000    384,000 ($320,000*1.2)

Total assets                                             $ 370,000 $ 444,000

Liabilities

Current liabilities

Accounts payable                                     $ 14,000      $16,800 ($14,000*1.2)

Total current liabilities                               $14,000      $16,800

Long-term debt Stockholders' equity     280,000     280,000

Common stock plus

additional paid-in capital                           15,000        15,000

Retained earnings                                      61,000      115,600

Total liabilities

and stockholders' equity                    $ 370,000  $427,400

External Financing Required = Assets - Liabilities & equity

Assets =                    $444,000

Liabilities + Equity = $427,400

External financing      $16,600

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