Question

The Most recent financial statements for Moose Tours, Inc., appear below. Sales for 2016 are projected to grow by 20 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.
2015 Income Statement

Sales $751,000

Costs $586,000

Other Expenses$ 22,000

Earings before Interest and taxes $143,000

Interest Expense $18,000

Taxable Income $125,000

Taxes (40%) $50,000

Net Income $75,000

Dividends $30,000

Addition to retained earnings $45,000

Balance Shhet as of December 31,2015

Assets

Current Assets

Cash $21,040

Accounts Receivable $33,360

Inventory $70,230

Total $ 124,720

FIxed Assets

Net Plant and equipment $240,000

Total Assets $364,720

Liabilities and Owner;s Equity

Current liablities

Accouts Payable $55,200

Notes Payable $14,400

Total $69,600

Long Term Debt $134,000

Owners equity

Common Stock and paid in surplus $120,000

Retained Earnings $41,420

Total $161,120

Total liabilities and owner's equity $364,720

If the firm is operating at full capacity and no new debt or equity is issued, what external finaning is needed to support the 20 percent growth rate in sales?

Answer 1

Answer:

$5,006.07

Explanation:

The external financing needed = Projected Increase in Assets - Increase in Liabilities - Increase in Retained Earnings

Projected Increase in Asset = Assets Value*Sales Growth Rate

Projected Increase in Assets = $364,720 * 20%

Projected Increase in Assets = $72,944

Increase in Liabilities = Liabilities * Sales Growth Rate

Increase in Liabilities = $69,600 * 20%

Increase in Liabilities = $13,920

To calculate the Increase in Retained Earning, the below calculations are needed:

a. Profit Margin Rate = Net Income / Sales * 100

Profit Margin Rate = 75,000 / 751,000 * 100

Profit Margin Rate = 9.99%

b. Dividend Payout Ratio = Dividend / Net Income * 100

Dividend Payout Ratio = 30,000 / 75,000 * 100

Dividend Payout Ratio = 0.4

Dividend Payout Ratio = 40%

Retention Rate = 1 - Dividend Payout Ratio

Retention Rate = 1 - 0.40

Retention Rate = 0.60

Retention Rate = 60%

c. Expected Sales = $751,000 * 1.20 = $901,200

So, the Increase in Retained Earning = Expected Sales * Profit Margin * Retention Rate = $901,200 *9.99% * 60% = $54,017.93

Therefore, External Fund Needed = $72,944 - $13,920 - $54,017.93 = $5,006.07