Concept explainers
EFN [LO2] The most recent financial statements for Reply, Inc., are shown here:
Assets and costs are proportional to sales. Debt and equity are not. A dividend of $2,400 was paid, and the company wishes to maintain a constant payout ratio. Next year’s sales are projected to be $32,085. What is the external financing needed?
To determine: The external financing needed.
Introduction:
The costs and assets are proportionate to sales whereas equity and debt are not proportionate to sales. The dividend paid during the year is $2,400. The company wants to maintain a constant payout ratio. The difference between the total assets and the total liabilities is known as External financing needed.
Answer to Problem 4QP
The external financing needed is $6,048.
Explanation of Solution
Given Information:
The dividend paid during the year is $2,400 and the company wants to sustain a constant payout ratio. The estimated sales during the next year are $32,085.
Formulae:
The formula to calculate the increase in percentage of sales:
The formula to calculate the dividend:
The formula to calculate the additional retained earnings:
Compute the increase in percentage of sales:
Hence, the increase in percentage of sales is 15%.
Compute the changes in the values of income statement by 15%:
Hence, the increase in sales is $32,085.
Compute the increase in cost:
Hence, the increase in cost is $20,815.
Calculate the increase in the value of taxes:
Hence, the increase in value of taxes is $4,508.
Pro forma income statement
R incorporationPro forma income statement | |
Particulars | Amount($) |
Sales | $32,085 |
Costs | $20,815 |
Taxable income | $11,270 |
Less: Taxes (40%) | $4,508 |
Net income | $6,762 |
Hence, the net income is $6,762.
Compute the changes in the values of balance sheet by 15%:
Hence, the increase in assets is $77,050.
Compute the dividend and additional retained earnings:
Since the company wish to maintain a constant payout ratio, the dividend can be determined as follows:
Hence, the dividend is $2,760.
Hence, the additional earnings are $4,002.
Compute the total equity:
Hence, the total equity is $43,602.
Prepare the Pro forma balance sheet:
R incorporationPro forma Balance Sheet | |||
Particulars | Amount($) | Particulars | Amount($) |
Assets | $77,050 | Debt | $27,400 |
Equity | $43,602 | ||
Total | $77,050 | Total | $71,002 |
Compute the external financing needed:
Hence, the external financing needed is $6,048.
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Chapter 4 Solutions
Fundamentals of Corporate Finance
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