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	Stockholders’ 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 stockholders’ 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.

Networking 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.

Answer rating: 100% (QA)

What is the required external financing over the next year Even if sa... View the full answer