The most recent financial statements for Fleury Inc., follow. Sales for 2012 are
ID: 2699218 • Letter: T
Question
The most recent financial statements for Fleury Inc., follow. Sales for 2012 are projected to grow by 25 percent. Interest expense will remain constant; the tax rate and the dividend payout rate will also remain constant. Costs, other expenses, current assets, fixed assets and accounts payable increase spontaneously with sales.
If the firm is operating at full capacity and no new debt or equity is issued, what external financing is needed to support the 25 percent growth rate in sales?
2011 Income Statement
Sales $ 750,000 Costs 585,000 Other expenses 21,000 Earnings before interest and taxes $ 144,000 Interest paid 17,000 Taxable income $ 127,000 Taxes (20%) 25,400 Net income 101,600
Dividends $ 20,320 Addition to retained earnings 81,280
Explanation / Answer
ANSWER
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Sales $ 6,300 Assets $ 18,300 Debt $ 12,400
Costs 3,890 Equity 5,900
Net income $ 2,410 Total $ 18,300 Total $ 18,300
Assets and costs are proportional to sales. Debt and equity are not. No dividends are paid. Next year%u2019s sales are projected to be $ 7,434. What is the external financing needed?
An increase of sales to $7,424 is an increase of:
Sales increase = ($7,424 %u2013 6,300) / $6,300
Sales increase = .18 or 18%
Assuming costs and assets increase proportionally, the pro forma financial statements will look like this:
Pro forma income statement Pro forma balance sheet
Sales $ 7,434 Assets $ 21,594 Debt $ 12,400
Costs 4,590 Equity 8,744
Net income $ 2,844 Total $ 21,594 Total $ 21,144
If no dividends are paid, the equity account will increase by the net income, so:
Equity = $5,900 + 2,844
Equity = $8,744
So the EFN is:
EFN = Total assets %u2013 Total liabilities and equity
EFN = $21,594 %u2013 21,144 = $450