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

Question

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The firm's projected net income for next year is $2,213,564. It pays out 65 percent of its net income as dividends, which equals $1,436,552.60. Therefore, the retained earnings will be $776,011.40 ($2,213,564 - $1,436,552.60). The firm's total assets are $9,751,223. If it grows at a rate of 20 percent next year, its total assets will be $11,701,467.60 ($9,751,223*1.20). The firm's total funding will then be $11,477,479 (total assets - retained earnings). Therefore, the external financing required by the firm will be $1,175,497.20 ($11,477,479 - $10,302,982.80).

Nederland Finance Company Has Total Assets Worth $9,751,223