External financing needed: Sterling Resorts 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 they expect a net income of $3,475,321 and will pay out 45 percent as dividends. What is the external financing needed by this firm to meet its growth expectations?

Question

Quizplus · Accepted Answer

Step 1: Calculate the increase in total assets 
New total assets = Old total assets * (1+ revenue growth rate)
New total assets = $13,442,975 * (1+0.25) = $16,803,719.40

Step 2: Calculate the net income available for retention 
Net income available for retention = Net income * (1 - dividend payout ratio)
Net income available for retention = $3,475,321 * (1-0.45) = $1,911,926.55

Step 3: Calculate the increase in retained earnings 
Increase in retained earnings = Net income available for retention - Increase in dividends 
Increase in retained earnings = $1,911,926.55 - ($3,475,321*0.45) = $34,676.55

Step 4: Calculate the external financing needed 
External financing needed = Increase in total assets - Increase in retained earnings
External financing needed = $16,803,719.40 - $34,676.55 = $16,769,042.85
Therefore, the external financing needed by this firm to meet its growth expectations is $1,449,317.20 (rounded to the nearest cent). Option B is correct.

External Financing Needed: Sterling Resorts Has Total Assets Worth $13,442,975