Problem: Using Percentage of Sales. Eagle Sports Supply has the following financial statements. Assume that Eagle’s assets are proportional to its sales.
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INCOME STATEMENT, 2003
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Sales
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$950
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Cost
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$250
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Interest
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$50
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Taxes
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$150
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Net Income
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$500
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BALANCE SHEET, YEAR-END
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2002
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2003
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2002
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2003
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Assets
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$2,700
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$3,000
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Debt
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$900
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$1,000
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Equity
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$1,800
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$2,000
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Total
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$2,700
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$3,000
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Total
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$2,700
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$3,000
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Question 1: Find Eagle’s required external funds if it maintains a dividend payout ratio of 70 percent and plans a growth rate of 15 percent in 2004.
Question 2: If Eagle chooses not to issue new shares of stock, what variable must be the balancing item? What will its value be?
Question 3: Now suppose that the firm plans instead to increase long-term debt only to $1,100 and does not wish to issue any new shares of stock. Why must the dividend payment now be the balancing item? What will its value be?