External financing needed: Nederland Finance Company has total assets worth $9,751,223. It is expecting to grow its revenue at a rate of 20 per cent next year and will have a profit of $2,213,564 next year. The company pays out 65 per cent of its profit as dividends. What is the external financing needed by this company to meet its growth expectations?

Question

Quizplus · Accepted Answer

To calculate the external funding needed, we need to use the Sustainable Growth Rate (SGR) formula:

SGR = (Net income / Total assets) × (1 - Dividend payout ratio)

SGR = ($2,213,564 / $9,751,223) × (1 - 0.65) = 0.0773 or 7.73%

Next, we need to calculate the expected increase in total assets based on the expected revenue growth:

Expected increase in total assets = Total assets × Revenue growth rate
Expected increase in total assets = $9,751,223 × 0.20 = $1,950,245.60

Finally, we can calculate the external financing needed:

External financing needed = (Expected increase in total assets × SGR) - Retained earnings

External financing needed = ($1,950,245.60 × 0.0773) - ($2,213,564 × 0.35) = $1,175,497.20

Therefore, the answer is A) $1,175,497.20.

External Financing Needed: Nederland Finance Company Has Total Assets Worth