Question

The most recent financial data for Ocean Movers, Inc. is: Sales $19,700, Costs $15,250, Taxes $1,513, Net income $2,937, Current assets $3,018, Fixed assets $18,282, Current liabilities $2,940, Long-term debt $7,600, Equity $10,760. Assets, costs, and current liabilities are proportional to sales. Long-term debt and equity are not. The company maintains a constant 50 percent dividend payout ratio. Next year's sales are projected to increase by 7 percent. What is the external financing need if the firm is currently operating at full capacity?

Answer 1

We first calculate the percentage increase in assets, costs, and current liabilities based on the projected increase in sales.

Step-by-step explanation:

To determine the external financing need if the firm is currently operating at full capacity, we need to calculate the increase in assets, costs, and current liabilities that would result from the projected increase in sales. For example, if sales increase by 7 percent, then current assets, costs, and current liabilities would also increase by 7 percent.

Given the current values, we can calculate the increase in each item: Current assets increase: $3,018 * 7% = $211.26. Costs increase: $15,250 * 7% = $1,067.50. Current liabilities increase: $2,940 * 7% = $205.80. To determine the external financing need, we subtract the increase in current liabilities from the increase in current assets and costs:

External financing need = $211.26 + $1,067.50 - $205.80 = $1,073.96. Therefore, the external financing need if the firm is operating at full capacity is $1,073.96.