The most recent financial statements for Assouad, Inc., are shown here: Income S
ID: 2813546 • Letter: T
Question
The most recent financial statements for Assouad, Inc., are shown here: Income Statement Sales Costs Balance Sheet Current Current liabilities Long-term $10,100 assets $ 4,650 $2,925 7150 Fixed assets 9,700 4,470 Taxable $2,950 income Equity 6,955 Taxes (22%) 649 Total $14,350 Total $14,350 Net income $ 2,301 Assets, costs, and current liabilities are proportional to sales. Long-term debt and equity are not. The company maintains a constant 35 percent dividend payout ratio. As with every other firm in its industry, next year's sales are projected to increase by exactly 18 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 ne ededExplanation / Answer
Solution: External financing needed $291.63 Working Notes: "Costs and assets vary with sales, but debt and equity do not" as the sales will increases by 6 % the costs & assets will also increases by 18 % but there will be no change in Debts & Equity. Pro forma income statement Sales 11,918.00 sales is increased by 18% [$10,100 x (1+ 0.18 )] Costs 8,437.00 costs is increased by 18% [$7,150 x (1+ 0.18 )] Taxable income 3,481.00 Less: Taxes @ 22% 765.82 [$3,481 x 22% ] Net income 2,715.18 Dividends paid out = Net income x payout ratio = $2,715.18 x 35% = $950.313 Earnings Retained =Net income x (1 - payout ratio) = $2,715.18 x (1- 0.35) = $1,764.867 Pro forma balance sheet Current Assets 5,487.00 Current liabilities 3,451.50 [2,925 x 1.18 ] [4,650 x 1.18 ] Long term Debt 4,470 no change assets is increased by 18% Equity 8,719.867 no change but addition of balance of net income after payment of dividend Fixed Assets 11,446.00 [6,955 + 1,764.867 ] [9,700 x 1.18 ] assets is increased by 18% Total 16,933.00 Total 16,641.367 Notes: The above balance sheet doest not balanced because there is External financing needed EFN External financing needed = Total assets - Total Liabilities & Equity = 16,933 - 16,641.367 = $291.633 Total Assets = 16,933 Total Liabilities & Equity = 16,641.367 Please feel free to ask if anything about above solution in comment section of the question.