The most recent financial statements for Fleury Inc., follow. Sales for 2012 are
ID: 2740493 • 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? (Do not round intermediate calculations.)Explanation / Answer
New income would be = (Old EBIT x (1+ Growth rate) – Interest) x (1- tax rate)
= (148,000 x (1+0.25) – 14,000) x (1- 0.20)
= 171,000x 0.80
= 136,800
Dividend payout ratio = Dividends/ Net Income
= 21,440 / 107,200
= 20%
New addition to retained earnings = new income x (1- dividend payout ratio)
= 136,800 x (1-0.20)
= 109,440
EFN =( total assets x growth rate) – (current liabilities x growth rate) - New addition to retained earnings
= (585,220 x 0.25) – (68600 x 0.25) – 109,440
=146,305 -17,150 -109,440
= 19,715
Hence, external financing needed is 19,715.