lapearla 2005 P&L Revenue $11,000 COGS $6050 Gross profit 4950 selling expenses 880 Operating $4070 interest $500 earnings before taxes 3570 tax 1071 net income 2499 Balance sheet current assets $2,200 net plant & equip $19800 Total assets $22,000 Current liabilities $1000 Long term debt 5000 Common stock 500 Retained earnings 15400 total liabilities & equity 22,000 If in 2006 everything elso remain unchanged except a 10% increase in revenue the company will have a financing a. deficiency if it pays no dividends b. surplus if it pays out all income in dividends c. surplus if it pays out 50% of its net income in dividends d. deficiency if it pays out 50% of its net income in dividends The answer is D but I don’t undestand how. pls help.
This is a crappy question. They need to be more direct in what they are asking. Anyway, I’m assuming they’re talking about CFF or cash flow from financing. If that is indeed the case, then the logic for D being the correct is because paying dividends affects CFF and is a cash outflow. A wouldn’t be correct because CFF wouldn’t be affected. B is incorrect because CFF would be negative. C is incorrect because CFF would be negative. Based on the information above, we can assume that the only item affecting CFF is the payment of dividends. If they were to show the balance sheet period-over-period then you would be able to see if any debt was issued or retired and then would have to calculate the the amount of the change in debt as well as the amount of dividends paid and then calculate CFF.
thanks TMurf your explanation sounds logical.
Looks like its talking about pro forma financial statements. we will have to assume that most of the accounts will changes in proportion to increase in revenue and some accounts are fixed (like interest, debt and tax rate) New revenue: 12100 COGs : 6655 Gross profit: 5445 Selling expense:968 Operation income: 4477 Interest: 500 earnings before taxes: 3977 tax: 1193 NI: 2784 Div: 1392 (assume 50 % as dividend) Balance sheet: CA: 2420 P&E: 21780 TA: 24200 Current liabilities $1100 Long term debt 5000 Common stock 500 Retained earnings 16792 total liabilities & equity 23392 So we have deficiency of 808