Question

Wagner Industrial Motors, which is currently operating at full capacity, has sales of $2,460, current assets of $800, current liabilities of $490, net fixed assets of $1,650, and a 5 percent profit margin. The firm has no long-term debt and does not plan on acquiring any. The firm does not pay any dividends. Sales are expected to increase by 10 percent next year. If all assets, short-term liabilities, and costs vary directly with sales, how much additional equity financing is required for next year

Answer 1

$60.70

Step-by-step explanation:

Calculation to determine how much additional equity financing is required for next year

First step is to calculate the Current total equity

Using this formula

Current total equity= Total assets - Total liabilities

Let plug in the formula

Current total equity = $1,650 + $800 - $490

Current total equity= $1,960

Second step is to calculate the Projected assets using this formula

Projected assets = Total assets * Projected increase in assets

Let plug in the formula

Projected assets =($1650 + $800 ) * (1 +10%)

Projected assets = $2,695

Third step is to calculate the Projected liabilities using this formula

Projected liabilities = Current liabilities * Projected increase in liabilities

Let plug in the formula

Projected liabilities = $490 * (1 + 10%)

Projected liabilities= $539

Fourth step is to calculate the Projected increase in retained earnings

Using this formula

Projected increase in retained earnings = Projected sales * Profit margin * Retention ratio

Let plug in the formula

Projected increase in retained earnings = ($2,460 * 110%) * 5% * 100%

Projected increase in retained earnings = $135.30

Now let calculate the Additional Equity funding needed using this formula

Additional Equity funding needed = Increase in assets - Increase in current liabilities - Current equity - Increase in retained earnings

Let plug in the formula

Additional Equity funding needed = $2,695 - $539 - $1,960 - $135.30

Additional Equity funding needed= $60.70

Therefore the additional equity financing that is required for next year will be $60.70