The 2015 financial statements for Growth Industries
Question
18-6)
The 2015 financial statements for Growth Industries are presented below: INCOME
STATEMENT, 2015 Sales $320,000 Costs 210,000 EBIT $110,000 Interest expense 22,000 Taxable income $88,000 Taxes (at 35%) 30,800 Net income $57,200 Dividends$ 28,600 Addition to retained earnings28,600
BALANCE SHEET, YEAR-END, 2015Assets Liabilities Current assets Current liabilities Cash$8,000 Accounts payable$15,000 Accounts receivable 13,000 Total current liabilities$15,000 Inventories 39,000 Long-term debt 220,000 Total current assets$60,000 Stockholders’ equity Net plant and equipment 260,000 Common stock plus additional paid-in capital 15,000 Retained earnings 70,000 Total assets$320,000 Total liabilities and stockholders’ equity$320,000
Sales and costs in 2016 are projected to be 20% 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 .50.
What is the required external financing over the next year?
Even if sales increase by 20%, 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.
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