Question

The Big Business Company will achieve $5 million in sales if they add $500,000 in assets, can raise $100,000 in additional external funding, and profit margins are 10%. If The Big Business Company retains 50% of earnings, what spontaneous funding (A/P) would the firm need to make this plan work?

Answer 1

Forecasted sales = 5000000

Increase in assets = 500000

External financing = 100000

Profit margin = 10%

retained earnings = 50%

External financing formula = increase in assets - Increase in sponatenous funding - (Profit margin * forecasted sales *retained earnings %)

100000 = 500000 - Increase in sponatenous funding - (10%*5000000*50%)

100000 = 500000 - Increase in sponatenous funding -250000

Increase in spontaneous funding = 500000-250000-100000

=150000

So $150000 spontaneous funding is requied to make this plan work