Question

The most recent financial statements for Hornick, Inc., are shown here (assuming no income taxes): Income Statement Balance Sheet Sales $ 8,300 Assets $ 23,200 Debt $ 9,000 Costs 5,490 Equity 14,200 Net income $ 2,810 Total $ 23,200 Total $ 23,200 Assets and costs are proportional to sales. Debt and equity are not. No dividends are paid. Next year’s sales are projected to be $9,545. What is the external financing needed? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

Answer:

The external financing needed is $248.50

Explanation:

For computing the external financing needed, first we have to find out the increase percentage of sales which is shown below:

As the given sales is $8,300 and projected sales is $9,545

So, the increase in percentage = (Projected sales - given sales) ÷ given sales × 100

= ($9,545 - $8,300) ÷ 8,300 × 100

= 15%

Now the projected net income equals to

= Projected sales - projected cost

= $9,545 - $6,313.50

= $3,231.50

The projected cost is computed below

= Cost + (cost × increase in percentage of sales)

= ($5,490 + $5,490 × 15%)

= $6,313.50

It is given that the assets and costs are proportional to sales,

So, the new asset value is = Assets + Assets × increase percentage of sales

= $23,200 + $23,200 × 15%

= $23,200 + $3,480

= $26,680

And, the equity value = Equity + net income

                                   = $14,200 + $3,231.50

                                   = $17,431.50

Plus, the debt is $9,000

The liabilities side = $17,431.50 + $9,000 = $26,431.50

So, the difference would be

= Asset - Liabilities

= $26,680 - $26,431.50

= $248.50