Question

Suppose that Gyp Sum Industries currently has the balance sheet shown below, and that sales for the year just ended were $10.4 million. The firm also has a profit margin of 20 percent, a retention ratio of 25 percent, and expects sales of $8.4 million next year.

Assets				Liabilities and Equity
Current assets	$	2,256,000		Current liabilities	$	1,930,240
Fixed assets		4,400,000		Long-term debt		1,700,000
				Equity		3,025,760
Total assets	$	6,656,000		Total liabilities and equity	$	6,656,000

If all assets and current liabilities are expected to shrink with sales, what amount of additional funds will Gyp Sum need from external sources to fund the expected growth? (Enter your answer in dollars not in millions. Negative amount should be indicated by a minus sign.)  

Answer 1

Change in Sales		10.4 - 8.4
		2,000,000
The necessary decrease in Assets will be
			A/S *change in sales
			6656000/10400000 *2000000
			1280000
Decrease in liabilities will be :
			L/S* Change in sales
			1930240/10400000*2000000
			371200
The projected decrease in retained earnings will be
M*S1 * R
0.2* 8400000* 0.25
420000
Additional fund need will be =			1280000-371200-420000
			488800