The Optical Scam Company has forecast a sales growth of 20 percent for next year. The current financial statements are shown here: Income Statement Sales $ 30,500,000 Costs 26,453,000 Taxable income $ 4,047,000 Taxes 1,416,450 Net income $ 2,630,550 Dividends $ 1,052,220 Addition to retained earnings 1,578,330 Balance Sheet Assets Liabilities and Owners' Equity Current assets $ 7,210,000 Accounts payable $ 6,405,000 Long-term debt 2,440,000 Fixed assets 17,495,000 Common stock $ 5,570,000 Accumulated retained earnings 10,290,000 Total equity $ 15,860,000 Total assets $ 24,705,000 Total liabilities and equity $ 24,705,000 a. Using the equation from the chapter, calculate the external financing needed for next year. (Do not round intermediate calculations and round your answer to the nearest whole dollar amount, e. g., 32.)

The external financing needed for next year is $1,766,004.

Explanation:

The external financing needed for next year can be calculated using the following formula:

External financing needed = ((Total assets / Sales) * Change in sales) - ((Short-term liabilities / Sales) * Change in sales) - ((Projected sales * Profit margin) * (1 - Dividend payout ratio)) (1)

Where;

Total assets =  $24,705,000

Sales = $30,500,000

Change in sales = Sales * Sales growth rate = $30,500,000 * 20% = $6,100,000

Short-term liabilities = Accounts payable = $6,405,000

Projected sales = Sales * (1 + Sales growth rate) = $30,500,000 * (1 + 20%) = $36,600,000

Profit margin = Net income / Sales = $2,630,550 / $30,500,000 = 0.0862475409836066

Dividend payout ratio = Dividends / Net income = $1,052,220 / $2,630,550 = 0.40

Substituting all the values into equation (1), we have:

External financing needed = (($24,705,000 / $30,500,000) * $6,100,000) - (($6,405,000 / $30,500,000) * $6,100,000) - (($36,600,000 * 0.0862475409836066) * (1 - 0.4))

External financing needed = $1,766,004

Therefore, the external financing needed for next year is $1,766,004.

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