Question

# Wagner Industrial Motors, which is currently operating at full capacity, has sales of \$2,400, current assets...

Wagner Industrial Motors, which is currently operating at full capacity, has sales of \$2,400, current assets of \$740, current liabilities of \$430, net fixed assets of \$1,590, 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 external equity financing is needed for next year?

Formula to calculate External equity financing is needed for next year

External equity financing is needed for next year = A0 * ΔS/S0 − L0 * ΔS/S0 - S1 * PM * b

Where,

A0 = current level of assets = Current asset + net fixed asset = \$740 + \$1,590 =\$2,330

S0 = current sales = \$2,400

ΔS/S0 = percentage increase in sales = 10%

L0 = current level of liabilities = \$430

S1 = Increased sales = S0*(1+10%) = \$2,400 *1.10 = \$2,640

PM = profit margin = 5%

In the case the company pays no dividends, the retained earnings is 100%

b = retention rate = 100% = 1

Therefore

AFN = \$2,330 * 10% - \$430 *10% - \$2,640 *5% *1

= \$233 - \$43 - \$132 = \$58.0

The external equity financing of \$58.0 is needed for next year

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