Question

Sybil Inc. had sales of $1,600,000 last year. The company has shown a steady profit margin of 16% over the last few years and has a consistent dividend payout of 60%. Both of these ratios are not expected to change in future years. The balance sheet for the year just ended is provided:

Sybil Inc.
Balance Sheet
As at December 31, 2017
Cash		50,000
Accounts receivable		130,000
Prepaid expenses		170,000
Total current assets		350,000
Property, plant and equipment (net)		1,200,000
Total assets		1,550,000
Accounts payable		75,000
Current portion of long term loan		35,000
Total current liabilities		110,000
Long term loan payable		720,000
Total liabilities		830,000
Common stock		150,000
Retained earnings		570,000
Total liabilities and shareholders equity		1,550,000

Sales are expected to increase by 25% in the next year. Include current portion of long term debt in your analysis.

Required -

Calculate the need for external financing under these independent circumstances:

a. The company has sufficient excess capacity to accommodate the increase in sales.

b.  The company will be required to increase property, plant and equipment by 15% to accommodate the increased sales.

c. The company will be required to increase property, plant and equipment by $20,000 to accommodate the increased sales.

Answer 1

original sales = $1600000

Increase in sale by 25%

New sales = $2000000

We are given that any increase in asset to accomodate the increase in sale is financed through long term debts.

(A) When the company has sufficient excess capacity to accomodate the new sale. There will be no extra need for assets. Thus no long term debts are used to finance.

(B) The company needs to increase property, plant and equipment by 15%.

Given property, plant and equipment = $1200000

Increase in property plant and equipment = 1200000*15% which is $180000.

So the long term debt required to finance the increase in sale will be $180000.

(C) Increase in property plant and equipment by $20000.

As the total increase in property plant and equipment will be $20000. So the company will need to finance $20000 through long term debt financing.