Determine the value of the External money needed for next year. 2. What would be the impact on ROE and Debt Equity ratios if the company decides to cover the external money needed by raising debt?
ABC Inc. is a juice producer which has been growing steadily for the past 5 years. According to the expected market demand, the company is planning to grow its sales at 15% next year. Since the company is currently operating at full capacity, fixed assets will also grow proportional to sales, same as current assets and current liabilities. However, long-term debt and equity will not grow proportional to sales but rather management will decide upon thier next year level based on an acceptable level of debt to equity ratio as well as ROE ratio. The company has a dividend pay-out ratio of 40% which the management want to maintain in order to meet the shareholders expectations. Below are the financial statements of ABC Inc. for the year ending Sept 2020.
| Amounts in 000s | |
| Sep-20 | |
| Sales | 5700 |
| Costs | 4200 |
| Taxable Income | 1500 |
| Taxes (34%) | 510 |
| Net Income | 990 |
| Amounts in 000s | |||
| Sept-20 | Sept-20 | ||
| Cash | 200 | Accounts Payable | 2000 |
| Accounts Receivables | 1600 | Accrued Expenses | 200 |
| Inventory | 2100 | Current Liabilities | 2200 |
| Current Assets | 3900 | Long-Term Debt | 3750 |
| Fixed Assets | 8100 | Equity | 6050 |
| Total Assets | 12000 | Total Liabilities and Equity | 12000 |
1. Determine the value of the External money needed for next year.
2. What would be the impact on ROE and Debt Equity ratios if the company decides to cover the external money needed by raising debt?
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