Sterling Resorts Co. has total assets worth $13,442,975. It is expecting to grow its revenue at a rate of 25 percent next year. For next year, it expects a net income of $3,475,321 and will pay out 45 percent as dividends. What is the external financing required by the firm to meet its growth expectations?

Question

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The external financing required is calculated by determining the retained earnings and comparing it to the increase in assets needed for growth. Retained earnings = Net income * (1 - Dividend payout ratio) = $3,475,321 * (1 - 0.45) = $1,911,426.55. The increase in assets needed = Total assets * Growth rate = $13,442,975 * 0.25 = $3,360,743.75. External financing required = Increase in assets - Retained earnings = $3,360,743.75 - $1,911,426.55 = $1,449,317.20.