The most recent financial statements for Fleury Inc., follow. Sales for 2012 are projected to grow by 25 percent. Interest expense will remain constant; the tax rate and the dividend payout rate will also remain constant. Costs, other expenses, current assets, fixed assets and accounts payable increase spontaneously with sales.

FLEURY, INC. 2011 Income Statement
Sales				$	761,000
Costs					596,000
Other expenses					17,000
Earnings before interest and taxes				$	148,000
Interest paid					18,000
Taxable income				$	130,000
Taxes (20%)					26,000
Net income					104,000
Dividends	$	20,800
Addition to retained earnings		83,200

FLEURY, INC. Balance Sheet as of December 31, 2011
Assets				Liabilities and Owners’ Equity
Current assets				Current liabilities
Cash	$	22,040		Accounts payable	$	56,200
Accounts receivable		34,360		Notes payable		15,400
Inventory		71,320		Total	$	71,600
Total	$	127,720		Long-term debt	$	144,000
Fixed assets				Owners’ equity
Net plant and equipment	$	450,000		Common stock and paid-in surplus	$	130,000
				Retained earnings		232,120
				Total	$	362,120
Total assets	$	577,720		Total liabilities and owners’ equity	$	577,720

If the firm is operating at full capacity and no new debt or equity is issued, what external financing is needed to support the 25 percent growth rate in sales? (Do not round intermediate calculations.)

EFN

$

Explanation:

Assuming costs vary with sales and a 25 percent increase in sales, the pro forma income statement will look like this:

FLEURY INC. Pro Forma Income Statement
Sales	$	951,250
Costs		745,000
Other expenses		21,250
EBIT	$	185,000
Interest		18,000
Taxable income	$	167,000
Taxes (20%)		33,400
Net income	$	133,600

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

Dividends	=	($20,800 / $104,000)($133,600)
Dividends	=	$26,720

And the addition to retained earnings will be:

Addition to retained earnings = $133,600 – 26,720

Addition to retained earnings = $106,880

The new retained earnings on the pro forma balance sheet will be:

New retained earnings = $232,120 + 106,880

New retained earnings = $339,000

The pro forma balance sheet will look like this:

FLEURY INC. Pro Forma Balance Sheet
Assets				Liabilities and Owners’ Equity
Current assets				Current liabilities
Cash	$	27,550		Accounts payable	$	70,250
Accounts receivable		42,950		Notes payable		15,400
Inventory		89,150		Total	$	85,650
Total	$	159,650		Long-term debt	$	144,000
Fixed assets				Owners’ equity
Net plant and equipment	$	562,500		Common stock and paid-in surplus	$	130,000
				Retained earnings		339,000
				Total	$	469,000
Total assets	$	722,150		Total liabilities and owners’ equity	$	698,650

So the EFN is:

EFN	=	Total assets – Total liabilities and equity
EFN	=	$722,150 – 698,650
EFN	=	$23,500