Question

Use the below information to answer the following question.

Income Statement
For the Year
Sales $36,200
Cost of goods sold 27,900
Depreciation 2,950

Earnings before interest and taxes $ 5,350
Interest paid 1,180

Taxable income $ 4,170
Taxes 1,270

Net income $ 2,900

Dividends $870


Balance Sheet
End-of-Year
Cash $ 350
Accounts receivable 3,150
Inventory 8,300

Total current assets $11,800
Net fixed assets 27,600

Total assets $39,400

Accounts payable $ 3,950
Long-term debt 14,700
Common stock ($1 par value) 12,500
Retained earnings 8,250



Total Liab. & Equity $39,400



This firm is currently operating at full capacity. The profit margin and the dividend payout ratio are held constant. Net working capital and fixed assets vary directly with sales. Sales are projected to increase by 11 percent. What is the external financing needed?

Answer 1

The external financing needed for the firm after an 11 percent increase in sales is $2,304.

Step-by-step explanation:

With an 11 percent increase in sales, projected sales for next year are $36,200 * 1.11 = $40,182. Net working capital is current assets minus current liabilities. At the end of the year, it was $11,800 - $3,950 = $7,850. An 11 percent increase in net working capital will require $7,850 * 1.11 = $8,713.50.

Net fixed assets will also increase by 11 percent. With a current level of $27,600, the new level will be $27,600 * 1.11 = $30,636. Therefore, the total projected assets will be $11,800 (current assets) + $27,600 (net fixed assets) = $39,400 * 1.11 = $43,734. To support the new sales level, the firm will need total assets of $43,734. The current total assets are $39,400.

Thus, we need an additional $43,734 - $39,400 = $4,334 in assets. The retained earnings are currently $8,250, and the net income is $2,900. $2,900 * (1 - $870 / $2,900) = $2,030 retained earnings increase. Thus, we subtract this from the additional assets needed: $4,334 - $2,030 = $2,304.