Question

The most recent financial data for Porter's Corner is:

Sales 4,650
Costs 4,160
Net income 490
Assets 5,820
Debt 2,760
Equity 3,060

Assets and costs are proportional to sales. Debt and equity are not. No dividends or taxes are paid. Next year's sales are projected to be 5,487. What is the amount of the external financing needed?

Answer 1

To calculate the amount of external financing needed, multiply the increase in sales by the proportion of assets to sales.

Step-by-step explanation:

To calculate the amount of external financing needed, we need to determine the increase in assets. Since assets are proportional to sales, we can find the increase in assets by multiplying the projected increase in sales by the proportion of assets to sales. In this case, the proportion is Assets/Sales, which is 5820/4650 = 1.25. Therefore, the increase in assets is 1.25 * (5487 - 4650) = 1034.25.

Next, we need to determine the increase in debt and equity. Since debt and equity are not proportional to sales, we need to calculate them separately. The increase in debt is projected sales minus previous debt, which is 5487 - 2760 = 2727. The increase in equity is the increase in assets minus the increase in debt, so 1034.25 - 2727 = -1692.75.

Finally, the amount of external financing needed is the absolute value of the increase in equity, so the external financing needed is $1692.75.