Give step-by-step solution with explanation and final answer:© You received no credit for this question in the previous attempt.
Problem 4-24 Calculating EFN [LO2]
The most recent financial statemen

Question

Give step-by-step solution with explanation and final answer:© You received no credit for this question in the previous attempt.
Problem 4-24 Calculating EFN [LO2]
The most recent financial statements for Crosby, Incorporated, follow. Sales for 2024 are projected to grow by 20 percent.
Interest expense will remain constant; the tax rate and the dividend payout rate will also remain constant. Costs, other expenses,
current assets, fixed assets, and accounts payable increase spontaneously with sales.
CROSBY, INCORPORATED
2023 Income Statement
Sales $ 747,000
Costs 582,000
Other expenses 18,000
Earnings before interest and
taxes $ 147,000
Interest paid 14,000
Taxable income $133,000
Taxes (24%) 31,920
Net income $ 101,080
Dividends $ 31,335
Addition to retained earnings 69,745
CROSBY, INCORPORATED
Balance Sheet as of December 31, 2023
Assets Liabilities and Owners’ Equity
Current assets Current liabilities
Cash $20,640 Accounts payable $ 54,800
Accounts receivable 43,580 Notes payable 14,000
Inventory 91,960 Total $ 68,800
Total $156,180 Long-term debt $ 130,000
Fixed assets Owners’ equity
Net plant and equipment $423,000 Common stock and paid-in surplus $ 1

VIPSolutions · Accepted Answer

Let's work through the problem step by step:

---

## **Step 1: Identify the Projected Sales for 2024**

2023 Sales: \$747,000  
Sales growth rate: **20%**

$$
\text{Projected Sales (2024)} = \$747,000 \times (1 + .20) = \$747,000 \times 1.20 = \$896,400
$$

---

## **Step 2: Forecast Spontaneous Accounts**

Spontaneous accounts increase directly with sales. These include:
- **Current assets** (cash, accounts receivable, inventory)
- **Accounts payable** (current liability)
- **Fixed assets**

Calculate the new balances:

#### **Current Assets:**
$$
\text{Current Assets (2023)} = \$156,180
$$
$$
\text{Current Assets (2024)} = \$156,180 \times 1.20 = \$187,416
$$

#### **Fixed Assets:**
$$
\text{Net Plant and Equipment (2023)} = \$423,000
$$
$$
\text{Net Plant and Equipment (2024)} = \$423,000 \times 1.20 = \$507,600
$$

#### **Accounts Payable:**
$$
\text{Accounts Payable (2023)} = \$54,800
$$
$$
\text{Accounts Payable (2024)} = \$54,800 \times 1.20 = \$65,760
$$

---

## **Step 3: Calculate Total Assets and Spontaneous Liabilities for 2024**

$$
\text{Total Assets (2024)} = \text{Current Assets (2024)} + \text{Net Plant and Equipment (2024)}
$$
$$
= \$187,416 + \$507,600 = \$695,016
$$

$$
\text{Spontaneous Liabilities (2024)} = \text{Accounts Payable (2024)} + \text{Notes Payable (unchanged)} + \text{Long-term Debt (unchanged)}
$$
But only **Accounts Payable** increases spontaneously. Notes payable and long-term debt do not unless specified.

So, **Total Spontaneous Liabilities = Accounts Payable (2024) = \$65,760**

---

## **Step 4: Calculate Addition to Retained Earnings for 2024**

First, forecast **Net Income** for 2024:

- **Earnings before interest and taxes (EBIT):**
  - Costs and other expenses rise with sales.
  - EBIT margin (from 2023): $\frac{\$147,000}{\$747,000} = 19.68\%$
  - EBIT (2024): $.1968 \times \$896,400 = \$176,429$

- **Interest** is constant: \$14,000

- **Taxable Income:** $EBIT - \text{Interest}$
  $$
  = \$176,429 - \$14,000 = \$162,429
  $$

- **Taxes (24%):**
  $$
  = .24 \times \$162,429 = \$38,983
  $$

- **Net Income:**
  $$
  = \$162,429 - \$38,983 = \$123,446
  $$

- **Dividend Payout Ratio (from 2023):**
  $$
  \text{Payout Ratio} = \frac{\$31,335}{\$101,080} = .31 \text{ (rounded)}
  $$

- **Addition to Retained Earnings (2024):**
  $$
  \text{Retained Earnings} = \text{Net Income} \times (1 - \text{Dividend Payout Ratio})
  $$
  $$
  = \$123,446 \times (1 - .31) = \$123,446 \times .69 = \$85,178
  $$

---

## **Step 5: Calculate Projected Equity for 2024**

$$
\text{Retained Earnings (2023)} = \$265,880
$$
$$
\text{Retained Earnings (2024)} = \$265,880 + \$85,178 = \$351,058
$$
$$
\text{Common stock and paid-in surplus (unchanged)} = \$114,500
$$
$$
\text{Total Equity (2024)} = \$114,500 + \$351,058 = \$465,558
$$

---

## **Step 6: Calculate Total Financing Available for 2024**

$$
\text{Total Liabilities and Equity (2024)} = \text{Accounts Payable (2024)} + \text{Notes Payable (unchanged)} + \text{Long-term Debt (unchanged)} + \text{Total Equity (2024)}
$$
Notes Payable = \$14,000 (unchanged)  
Long-term debt = \$130,000 (unchanged)

$$
= \$65,760 + \$14,000 + \$130,000 + \$465,558 = \$675,318
$$

---

## **Step 7: Calculate EFN (External Financing Needed)**

$$
\text{EFN} = \text{Total Assets (2024)} - \text{Total Liabilities and Equity (2024)}
$$
$$
= \$695,016 - \$675,318 = \$19,698
$$

---

## **Final Answer**

### **EFN = \$19,698**

---

### **Summary Table**

| Step | Calculation | Result      |
|------|-------------|-------------|
| 1    | Projected Sales          | \$896,400   |
| 2    | Current Assets (2024)    | \$187,416   |
| 2    | Fixed Assets (2024)      | \$507,600   |
| 2    | Accounts Payable (2024)  | \$65,760    |
| 3    | Total Assets (2024)      | \$695,016   |
| 4    | Net Income (2024)        | \$123,446   |
| 4    | Retained Earnings (2024) | \$351,058   |
| 5    | Total Equity (2024)      | \$465,558   |
| 6    | Total Liabilities & Equity | \$675,318 |
| 7    | EFN                      | **\$19,698**|

---

**External Financing Needed (EFN) = \$19,698**

*Rounded to the nearest whole number as instructed.*

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