The most recent financial statements for GPS, Inc., are shown here:
| Income Statement | | Balance Sheet | |
| Sales | $ | 33,900 | | Assets | $ | 56,800 | | Debt | $ | 22,400 | |
| Costs | | 24,800 | | | | | | Equity | | 34,400 | |
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| Taxable income | $ | 9,100 | | Total | $ | 56,800 | | Total | $ | 56,800 | |
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| Taxes (40%) | | 3,640 | | | | | | | | | |
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| Net income | $ | 5,460 | | | | | | | | | |
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Assets
and costs are proportional to sales. Debt and equity are not. A
dividend of $1,600 was paid, and the company wishes to maintain a
constant payout ratio. Next year’s sales are projected to be $40,680.
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What is the external financing needed?
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Explanation:
An increase of sales to $40,680 is an increase of:
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| Sales increase | = | ($40,680 – 33,900) / $33,900 |
| Sales increase | = | 0.20, or 20% |
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Assuming costs and assets increase proportionally, the pro forma financial statements will look like this:
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| Pro forma income statement | | Pro forma balance sheet | |
| Sales | $ | 40,680 | | Assets | $ | 68,160 | | Debt | $ | 22,400 | |
| Costs | | 29,760 | | | | | | Equity | | 39,032 | |
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| EBIT | $ | 10,920 | | Total | $ | 68,160 | | Total | $ | 61,432 | |
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| Taxes (40%) | | 4,368 | | | | | | | | | |
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| Net income | $ | 6,552 | | | | | | | | | |
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The payout ratio is constant, so the dividends paid this year is the payout ratio from last year times net income, or:
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| Dividends | = | ($1,600 / $5,460)($6,552) |
| Dividends | = | $1,920 |
The addition to retained earnings is:
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| Addition to retained earnings | = | $6,552 – 1,920 |
| Addition to retained earnings | = | $4,632 |
And the new equity balance is:
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| Equity | = | $34,400 + 4,632 |
| Equity | = | $39,032 |
| EFN | = | Total assets – Total liabilities and equity |
| EFN | = | $68,160 – 61,432 |
| EFN | = | $6,728 |
The most recent financial statements for Cornwall, Inc., are shown here:
ReplyDeleteIncome Statement Balance Sheet
Sales $ 7,300 Current assets $ 4,000 Current liabilities $ 2,200
Costs 5,950 Fixed assets 9,800 Long-term debt 3,750
Taxable income $ 1,350 Equity 7,850
Taxes (34%) 459 Total $ 13,800 Total $ 13,800
Net income $ 891
Assets, costs, and current liabilities are proportional to sales. Long-term debt and equity are not. The company maintains a constant 30 percent dividend payout ratio. As with every other firm in its industry, next year’s sales are projected to increase by exactly 10 percent.
What is the external financing needed?