The 2015 financial statements for Growth Industries are presented below:
INCOME STATEMENT, 2015
Sales
$
250,000
Costs
175,000
EBIT
$
75,000
Interest expense
15,000
Taxable income
$
60,000
Taxes (at 35%)
21,000
Net income
$
39,000
Dividends
$ 23,400
Addition to retained earnings
15,600
BALANCE SHEET, YEAR-END, 2015
Assets
Liabilities
Current assets
Current liabilities
Cash
$
8,000
Accounts payable
$
15,000
Accounts receivable
13,000
Total current liabilities
$
15,000
Inventories
29,000
Long-term debt
150,000
Total current assets
$
50,000
Stockholdersâ equity
Net plant and equipment
190,000
Common stock plus additional paid-in capital
15,000
Retained earnings
60,000
Total assets
$
240,000
Total liabilities and stockholdersâ equity
$
240,000
Sales and costs in 2016 are projected to be 40% higher than in 2015. Both current assets and accounts payable are projected to rise in proportion to sales. The fixed assets of Growth Industries are operating at only 70% of capacity. Interest expense in 2016 will equal 10% of long-term debt outstanding at the start of the year. The firm will maintain a dividend payout ratio of .60.
What is the required external financing over the next year?
Answer:
Even if sales increase by 40%, the firm still has more than enough fixed assets to meet production. Only working capital will increase. Net working capital of the firm in 2015 was $_______ . The increase in net working capital will be $________ , which is less than the increase in the retained earnings. Thus required external financing is $________ . A negative external financing value indicates the firm will generate more cash than it needs to finance the projected growth. This extra cash can be used to reduce debt, repurchase shares, increase cash reserves, or fund future growth. This extra cash was primarily due to the firm's excess production capacity.
| The 2015 financial statements for Growth Industries are presented below: |
| INCOME STATEMENT, 2015 | |||
| Sales | $ | 250,000 | |
| Costs | 175,000 | ||
| EBIT | $ | 75,000 | |
| Interest expense | 15,000 | ||
| Taxable income | $ | 60,000 | |
| Taxes (at 35%) | 21,000 | ||
| Net income | $ | 39,000 | |
| Dividends | $ 23,400 | ||
| Addition to retained earnings | 15,600 | ||
| BALANCE SHEET, YEAR-END, 2015 | |||||
| Assets | Liabilities | ||||
| Current assets | Current liabilities | ||||
| Cash | $ | 8,000 | Accounts payable | $ | 15,000 |
| Accounts receivable | 13,000 | Total current liabilities | $ | 15,000 | |
| Inventories | 29,000 | Long-term debt | 150,000 | ||
| Total current assets | $ | 50,000 | Stockholdersâ equity | ||
| Net plant and equipment | 190,000 | Common stock plus additional paid-in capital | 15,000 | ||
| Retained earnings | 60,000 | ||||
| Total assets | $ | 240,000 | Total liabilities and stockholdersâ equity | $ | 240,000 |
| Sales and costs in 2016 are projected to be 40% higher than in 2015. Both current assets and accounts payable are projected to rise in proportion to sales. The fixed assets of Growth Industries are operating at only 70% of capacity. Interest expense in 2016 will equal 10% of long-term debt outstanding at the start of the year. The firm will maintain a dividend payout ratio of .60. |
| What is the required external financing over the next year? |
Answer:
| Even if sales increase by 40%, the firm still has more than enough fixed assets to meet production. Only working capital will increase. Net working capital of the firm in 2015 was $_______ . The increase in net working capital will be $________ , which is less than the increase in the retained earnings. Thus required external financing is $________ . A negative external financing value indicates the firm will generate more cash than it needs to finance the projected growth. This extra cash can be used to reduce debt, repurchase shares, increase cash reserves, or fund future growth. This extra cash was primarily due to the firm's excess production capacity. |
Related questions
| The 2015 financial statements for Growth Industries are presented below: |
| INCOME STATEMENT, 2015 | |||
| Sales | $ | 340,000 | |
| Costs | 220,000 | ||
| EBIT | $ | 120,000 | |
| Interest expense | 24,000 | ||
| Taxable income | $ | 96,000 | |
| Taxes (at 35%) | 33,600 | ||
| Net income | $ | 62,400 | |
| Dividends | $ 18,720 | ||
| Addition to retained earnings | 43,680 | ||
| BALANCE SHEET, YEAR-END, 2015 | |||||
| Assets | Liabilities | ||||
| Current assets | Current liabilities | ||||
| Cash | $ | 3,000 | Accounts payable | $ | 10,000 |
| Accounts receivable | 8,000 | Total current liabilities | $ | 10,000 | |
| Inventories | 29,000 | Long-term debt | 240,000 | ||
| Total current assets | $ | 40,000 | Stockholdersâ equity | ||
| Net plant and equipment | 280,000 | Common stock plus additional paid-in capital | 15,000 | ||
| Retained earnings | 55,000 | ||||
| Total assets | $ | 320,000 | Total liabilities and stockholdersâ equity | $ | 320,000 |
| Sales and costs in 2016 are projected to be 40% higher than in 2015. Both current assets and accounts payable are projected to rise in proportion to sales. The fixed assets of Growth Industries are operating at only 70% of capacity. Interest expense in 2016 will equal 10% of long-term debt outstanding at the start of the year. The firm will maintain a dividend payout ratio of .30. |
| What is the required external financing over the next year? |
| Even if sales increase by 40%, the firm still has more than enough fixed assets to meet production. Only working capital will increase. Net working capital of the firm in 2015 was $. The increase in net working capital will be $, which is less than the increase in the retained earnings. Thus required external financing is $. A negative external financing value indicates the firm will generate more cash than it needs to finance the projected growth. This extra cash can be used to reduce debt, repurchase shares, increase cash reserves, or fund future growth. This extra cash was primarily due to the firm's excess production capacity. |
The 2015 financial statements for Growth Industries are presented below:
| INCOME STATEMENT, 2015 | |||
| Sales | $ | 330,000 | |
| Costs | 215,000 | ||
| EBIT | $ | 115,000 | |
| Interest expense | 23,000 | ||
| Taxable income | $ | 92,000 | |
| Taxes (at 35%) | 32,200 | ||
| Net income | $ | 59,800 | |
| Dividends | $ 35,880 | ||
| Addition to retained earnings | 23,920 | | |
BALANCE SHEET, YEAR-END, 2015
| Assets | Liabilities | ||||
| Current assets | Current liabilities | ||||
| Cash | $ | 9,000 | Accounts payable | $ | 16,000 |
| Accounts receivable | 14,000 | Total current liabilities | $ | 16,000 | |
| Inventories | 37,000 | Long-term debt | 230,000 | ||
| Total current assets | $ | 60,000 | Stockholdersâ equity | ||
| Net plant and equipment | 270,000 | Common stock plus additional paid-in capital | 15,000 | ||
| Retained earnings | 69,000 | ||||
| Total assets | $ | 330,000 | Total liabilities and stockholdersâ equity | $ | 330,000 |
Sales and costs in 2016 are projected to be 30% higher than in 2015. Both current assets and accounts payable are projected to rise in proportion to sales. The fixed assets of Growth Industries are operating at only 75% of capacity. Interest expense in 2016 will equal 10% of long-term debt outstanding at the start of the year. The firm will maintain a dividend payout ratio of .60.
| What is the required external financing over the next year? |
Even if sales increase by 30%, the firm still has more than enough fixed assets to meet production. Only working capital will increase.
Net working capital of the firm in 2015 was $____
The increase in net working capital will be $____, which is less than the increase in the retained earnings.
Thus required external financing is $_____
A negative external financing value indicates the firm will generate more cash than it needs to finance the projected growth. This extra cash can be used to reduce debt, repurchase shares, increase cash reserves, or fund future growth. This extra cash was primarily due to the firm's excess production capacity.
