The most recent financial statements for Assouad, Inc., are shown here: Income S
ID: 2812952 • Letter: T
Question
The most recent financial statements for Assouad, Inc., are shown here: Income Statement Sales Costs Taxable Balance Sheet Current liabilities Long-term debt $9,900 Current $4,500 $2,850 assets 7,000 Fixed assets 9,600 4,400 $2,900 Equity 6,850 income Taxes (24%) 696 Total $14,100 Total $14,100 Net income $2,204 Assets, costs, and current liabilities are proportional to sales. Long-term debt and equity are not. The company maintains a constant 45 percent dividend payout ratio. As with every other firm in its industry, next year's sales are projected to increase by exactly 16 percent. What is the external financing needed? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) External financing neededExplanation / Answer
External Financing Needed(EFN) can be calculated as
[A0/S0*(S1-S0)] - [L0/S0*(S1-S0)] - [M*S1*b]
where
A0 - Assets (at time 0) which vary directly with Sales = 14,100
S0 - Current Sales = 9,900
S1 - Projected Sales = Current Sales * (1+growth rate) = 9900*1.16 = 11,484
LO - Liabilities (at time 0) which vary directly with Sales = 2,850
M - Profit Margin =2204/9900
b - Retention Ratio = 1- Payout ratio = 1-.45 = .55
[14100/9900*(11484-9900)] - [2850/9900*(11484-9900)] - [2204/9900*11484*.55]
2256 - 456 - 1406.152
393.85
*In question it specifically states that the assets,costs and current liabilities are proportional to sales and long term debt and equity are not. A0 and L0 includes only those which vary directly with Sales.