The most recent financial statements for Summer Tyme, Inc., are shown here: Inco
ID: 2808713 • Letter: T
Question
The most recent financial statements for Summer Tyme, Inc., are shown here: Income Statement Balance Sheet Sales $4,200 Current assets $4,700 Current liabilities $880 Costs 2,000 Fixed assets 6,700 Long-term debt 3,600 Taxable income $2,200 Equity 6,920 Taxes (31%) 682 Total $11,400 Total $11,400 Net income $1,518 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 25 percent. Required: What is the external financing needed? (Do not round your intermediate calculations.)
Explanation / Answer
Total assets would be=$11400*1.25
=$14250
Total current liabilities=$880*1.25
=$1100
Total equity=($6920+Addition to retained earnings)
=(6920+$948.75)=$7868.75
Total assets=Total liabilities+Total equity
Hence external financing needed=($14250-[7868.75+($1100+3600)]
=$1681.25
Sales(4200*1.25) 5250 Costs(2000*1.25) 2500 Taxable income $2750 Taxes@31% $852.5 Net income $1897.5 Less:dividends(1897.5*0.5) $948.75 Addition to retained earnings $948.75