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    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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    Solution Preview

    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 ...

    Solution Summary

    The solution explains the calculation of external funds required using the percentage of sales method

    $2.49

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