The most recent financial statements for GPS, Inc., are shown here:

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
Taxable income	$	9,100		Total	$	56,800		Total	$	56,800
Taxes (40%)		3,640
Net income	$	5,460

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.

What is the external financing needed?

External financing needed

$

Explanation:

An increase of sales to $40,680 is an increase of:

Sales increase	=	($40,680 – 33,900) / $33,900
Sales increase	=	0.20, or 20%

Assuming costs and assets increase proportionally, the pro forma financial statements will look like this:

Pro forma income statement				Pro forma balance sheet
Sales	$	40,680		Assets	$	68,160		Debt	$	22,400
Costs		29,760						Equity		39,032
EBIT	$	10,920		Total	$	68,160		Total	$	61,432
Taxes (40%)		4,368
Net income	$	6,552

The payout ratio is constant, so the dividends paid this year is the payout ratio from last year times net income, or:

Dividends	=	($1,600 / $5,460)($6,552)
Dividends	=	$1,920

The addition to retained earnings is:

Addition to retained earnings	=	$6,552 – 1,920
Addition to retained earnings	=	$4,632

And the new equity balance is:

Equity	=	$34,400 + 4,632
Equity	=	$39,032

So the EFN is:

EFN	=	Total assets – Total liabilities and equity
EFN	=	$68,160 – 61,432
EFN	=	$6,728