Final answer:
The student is interested in calculating the external financing need for Circus Canine in the event of an 11% increase in sales. This entails working out the increase in assets required to support the sales increase and subtracting the funds that the company can self-finance through retained earnings. Any shortfall represents the external financing needed.
Step-by-step explanation:
The student is asking about the external financing need for Circus Canine if the company increases its sales by 11 percent, assuming that certain financial elements such as net profit margin and dividend payout ratio remain constant, and net working capital as well as fixed assets vary directly with sales.
To solve for the external financing need, we need to understand the company's current financial situation. With current liabilities of $3,950, long-term debt of $14,700, net working capital of $7,850, net fixed assets of $27,600, owners' equity of $20,750, net income of $2,900, and dividends paid of $870, we can calculate the total assets and the retained earnings for the current situation. Then, we determine the projected increase in assets due to the 11% sales increase and compare it to the projected internal financing available from retained earnings. The difference, if any, would be the external financing need.
It's important to remember that net working capital is current assets minus current liabilities. Therefore, the projected increase in sales will increase both current assets and fixed assets directly. Subtracting the additional retained earnings (net income minus dividends) from the needed increase in assets will provide the external financing requirement.