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    Calculating External Financing Needed

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    Trying to find the external financing needed to support the 20% growth rate in sales of a company who is operating at full capacity and no debt or equity is issued with the following information:

    Sales for 2007 are projected to grow by 20 percent.

    Interest expense will remain constant; the tax rate and the dividend payout rate will remain constant.

    Costs, other expenses, current assests, and accounts payable increase spontaneously with sales.

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    Solution Preview

    Please see the attached file.

    In calculating the EFN we first make the proforma income statement and balance sheet

    Income Statement
    2007 Proforma
    Sales $845,000 1,014,000 Sales will increase by 20%
    Costs 657,000 788,400 Costs will increase by 20% - the same rate as sales
    Other Expenses 17,500 21,000 Costs will increase by 20% - the same rate as sales
    Earnings before interest and taxes $170,500 204,600
    Interest paid 12,500 12,500 remains the ...

    Solution Summary

    The solution explains how to determine the amount of external financing needed given the growth in sales