Ritchie Marble Company has total assets of $12,899,450, sales of $18,1

QUESTION

Ritchie Marble Company has total assets of $12,899,450, sales of $18,174,652, and net income of $4,589,774. Management expects sales to grow by 25 percent next year. All assets and costs (including taxes) vary directly with sales, and management expects to maintain a payout ratio of 65 percent. Calculate Ritchies EFN.
Concept: External fund needed is used to determine the external amount required to support the forecasted sales. It can be calculated as: External Fund Needed (EFN) = (Growth Rate*Initial Assets Addition to Retained Earnings) Addition to retained earning can be calculated by: Addition to Retained Earnings = Expected Net Income*(1- Payout Ratio) Solution: Total Assets of Ritchie Marble Company = $12899450 Net Income = $4589774 Growth Rate = 25% Payout ratio = 65% As all assets and costs (including taxes)¦

y directly with sales, Net income will also increase with the same growth rate. Expected Net Income = $4589774*(1+25%) = $5737217.50 Addition to Retained Earnings = $5737217.50*(1-65%) = $2008026.125 External Fund Needed (EFN) = ((25%*$12899450) “ $2008026.125) = $1216836.375 Therefore, Ritchies External Fund Needed (EFN) is $1216836.38 .

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