18-6)

The 2015 financial statements for Growth Industries are presented below:

INCOME STATEMENT, 2015Sales$320,000Costs210,000EBIT$110,000Interest expense22,000Taxable income$88,000Taxes (at 35%)30,800Net income$57,200Dividends$ 28,600Addition to retained earnings28,600

BALANCE SHEET, YEAR-END, 2015AssetsLiabilitiesCurrent assetsCurrent liabilitiesCash$8,000Accounts payable$15,000Accounts receivable13,000Total current liabilities$15,000Inventories39,000Long-term debt220,000Total current assets$60,000Stockholders equityNet plant and equipment260,000Common stock plus additional paid-in capital15,000Retained earnings70,000Total assets$320,000Total 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.