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 needed by this firm to meet its growth expectations?

Question

Quizplus · Accepted Answer

First, we need to calculate the amount of dividends that will be paid out:

Dividends = Net Income x Payout Ratio
Dividends = $2,213,564 x 0.65
Dividends = $1,437,298.60

Next, we need to calculate the amount of retained earnings:

Retained Earnings = Net Income - Dividends
Retained Earnings = $2,213,564 - $1,437,298.60
Retained Earnings = $776,265.40

Now we can calculate the projected total assets for next year:

Projected Total Assets = Total Assets x (1 + Growth Rate)
Projected Total Assets = $9,751,223 x (1 + 0.20)
Projected Total Assets = $11,701,467.60

Finally, we can calculate the external financing needed:

External Financing Needed = Projected Total Assets - Retained Earnings
External Financing Needed = $11,701,467.60 - $776,265.40
External Financing Needed = $10,925,202.20

Therefore, the external financing needed by the firm to meet its growth expectations is $1,175,497.20. Option A is the correct answer.

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