Percentage of Sales Method
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Using Percentage of Sales. Eagle Sports Supply has the following financial statements. Assume
that Eagle's assets are proportional to its sales.
INCOME STATEMENT, 2003
Sales $ 950
Costs 250
Interest 50
Taxes 150
Net income $ 500
If sales increase by 20 percent in 2004, and the company uses a strict percentage of sales planning
model (meaning that all items on the income and balance sheet also increase by 20 percent),
what must be the balancing item? What will be its value?
BALANCE SHEET, YEAR-END
2002 2003 2002 2003
Assets $ 2,700 $ 3,000 Debt $ 900 $ 1,000
Equity 1,800 2,000
Total $ 2,700 $ 3,000 Total $ 2,700 $ 3,000
a. Find Eagle's required external funds if it maintains a dividend payout ratio of 70 percent and
plans a growth rate of 15 percent in 2004.
b. If Eagle chooses not to issue new shares of stock, what variable must be the balancing item?
What will its value be?
c. Now suppose that the firm plans instead to increase long-term debt only to $1,100 and does
not wish to issue any new shares of stock. Why must the dividend payment now be the balancing
item? What will its value be?
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The solution explains the calculation of external funds required using the percentage of sales method
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If sales increase by 20 percent in 2004, and the company uses a strict percentage of sales planning
model (meaning that all items on the income and balance sheet also increase by 20 percent),
what must be the balancing item? What will be its value?
If sales increase by 20%, and everything also increases by 20%, the increase in assets in 3000X20%=$600. The net income for the year is also $600. If no external financing is to be taken, then dividends are the ...
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