Final answer:
ICU will need additional financing of $268,750 next year after considering the proportional increases in current assets and liabilities with sales, the additional net fixed assets requirement, and the reinvestment of earnings.
Step-by-step explanation:
The student has posed a question about determining the additional financing needed by a company called ICU for the next year given certain financial metrics and assumptions about the company's growth and dividend payout policy.
To calculate the additional financing needed, we need to follow these steps:
- Calculate the projected increase in sales: $3,500,000 × 25% = $875,000.
- Determine the projected total sales for next year: $3,500,000 + $875,000 = $4,375,000.
- Calculate the increase in current assets and liabilities based on the proportionate sales increase: Current assets will increase by $800,000 × 25% = $200,000 and accounts payable will increase by $1,200,000 × 25% = $300,000.
- The projected net profit will be 6% of the new sales level: $4,375,000 × 6% = $262,500.
- Since 50% of the earnings are paid as dividends, the amount reinvested into the business equals $262,500 × 50% = $131,250.
- Calculate the total projected financing need: $500,000 (new fixed assets) + $200,000 (increase in current assets) - $300,000 (increase in liabilities) = $400,000.
- Subtract the reinvested profits from the total financing need: $400,000 - $131,250 = $268,750.
Hence, the additional financing that ICU will need for the next year amounts to $268,750.