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JB Markets has sales of $848,600, net income of $94,000, dividends paid of $28,200, total assets of $913,600, and current liabilities of $78,900. Assume that all costs, assets, and current liabilities change spontaneously with sales. The tax rate and dividend payout ratios remain constant. If the firm's managers project a firm growth rate of 15 percent for next year, what will be the amount of external financing needed to support this level of growth? Assume the firm is currently operating at full capacity.

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saqib097

Answer:

The external financing needed to support this level of growth would be $49,535.

Explanation:

The complete formula (EFN) is expressed as:

EFN = (A/S) x (Δ Sales) - (L/S) x (Δ Sales) - (PM x FS x (1-d))

d=dividend payout ratio

= $28,200/$94,000= 0.3

EFN = $913,600(.15) − $78,900(.15) − $94,000(1.15)[1 − 0.3)}

EFN = 137040 - 11835 - 108100(0.7)

EFN = 125205 - 75670

EFN= $49,535

Answer:

The question is incomplete because it only mentions the items affected by the growth leaving Equity and Non-current liabilities unknown but External Financing Needed is the difference between the increase in the Total assets and that of the retained income of a growing company.

Explanation:

To balance the balance sheet a plug variable is needed because of that difference in assets and Equity plus Liability section. When a company is operating at full capacity the choices of a plug variable are:  

1. Borrow more short term loan

2. Borrow more long term loan

3. Sell more shares

4. Decrease dividend payout  which increases the additions to retained earnings

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