For the next fiscal year, you forecast net income of and ending assets of . Your firm's payout ratio is Your beginning stockholders' equity is and your beginning total liabilities are . Your non-debt liabilities such as accounts payable are forecasted to increase by . Assume your beginning debt is . What amount of equity and what amount of debt would you need to issue to cover the net new financing in order to keep your debt-equity ratio constant? The Tax Cuts and Jobs Act of 2017 temporarily allows 100% bonus depreciation (effectively expensing capital expenditures). However, we will still include depreciation forecasting in this chapter and in these problems in anticipation of the return of standard depreciation practices during your career. The amount of equity to issue will be

"you forecast net income of $50,000 and ending assets of $500,000. Your firm's payout ratio is 10%. Your beginning stockholders equity is $300,000 and your beginning total liabilities are $120,000. Your non-debt liabilities such as accounts payable are forecasted to increase by $10,000. What is you net new financing needed for next year?"

we must first determine the debt to assets ratio = $120,000 / ($300,000 + $120,000) = 0.2857

since total assets are expected to be $500,000, then total liabilities + equity will also = $500,000 (basic accounting equation)

since debt to equity ratio should remain constant, then:

total liabilities = $500,000 x 0.2857 = $142,850

total equity = $500,000 - $142,850 = $357,150

we can verify our calculations:

old debt to equity ratio = $120,000 / $300,000 = 0.4

new debt to equity ratio = $142,820 / $357,150 = 0.4

since your current equity = $300,000, you will need to raise $57,150

your current liabilities + future accounts payable = $120,000 + $10,000 = $130,000, therefore, you will need to issue debt for $142,850 - $130,000 = $12,850