For the next fiscal year, you forecast net income of $50,000 and ending assests
ID: 2662972 • Letter: F
Question
For the next fiscal year, you forecast net income of $50,000 and ending assests of $500,000. Your firm's payout ratio is 10%. Your beginning stockholders equity is $300,000 and your beginning total liabilities are $120,000. Your non-debt liabilites such as accounts payable are forecasted to increase by $10,000. What is you net new financing needed for next year?Here is your helpful hint for the week: ( from professor)
Additions to equity = net income x retention ratio= 50,000 x (1-.10) = 45,000
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Explanation / Answer
The Ending assets is $500,000. So, total liabilties should also be equal to $500,000 (a) Begining Stock holders equity $300,000 Add: retained earnings $45,000 Total stock holders fund $345,000 (b) Begining liabilities $120,000 Add: Increase in accounts payable $10,000 Total Ending liablities $130,000 Total of (a) and (b) = $345,000 + $130,000 = $475,000 Financing needed for next year = Total Liablities required to match total assets - Total of Stock holders funds and Liablities. = $500,000 - $475,000 = $25,000. The new Balance sheet can be prepared to check the above. BALANCE SHEET ASSETS LIABILTIES Total Assets $500,000 Stockholder’s funds $345,000 Other Liabilities $130,000 Debt (Finance) $ 25,000 _________ ________ $500,000 $500,000 ====== ========