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    External funding and growth rate

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    A company has the following Income Statement and Balance Sheet:
    Income Statement
    Sales $26,400
    Expenses $17,300
    Taxable Income $9,100
    Taxes (40%) $3,640
    Net Income $5,460

    Dividends $ 2,300
    Additional Retained Earnings 3,160

    Balance Sheet
    Total Assets $65,000 Debt $27,400
    Equity $37,600
    Total $6,5000 Total $65,000

    Assets and costs are presumed to be proportional to Sales. Debt and Equity are not. Current dividends of $ 2,300 were paid; and the company's dividend policy is to maintain a constant payout ratio. Next year Sales are projected to be $ 30,360.
    Given this information, how much additional (external) funding will the company need to support its projected Sales growth?
    Prepare a pro forma Balance Sheet which reflects this estimated funding requirement as a "plug" number.
    If the starting capital structure is considered optimal and flotation costs for equity are 5% and the administrative costs of borrowing are 3%, how much capital will the company need to raise to meet its projected asset requirements?
    What is the external funding requirement if the company has a constant dividend policy with a 3% annual growth rate? (Do not consider flotation cost).

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    Solution Summary

    The solution discusses the external funding and growth rate.