Question

Urban’s, which is currently not operating at full capacity, has sales of $47,000, current assets of $5,100, current liabilities of $6,200, net fixed assets of $51,500, and a 5 percent profit margin. The firm has no long-term debt and does not plan on acquiring any. No new equity will be issued. The firm does not pay any dividends. Sales are expected to increase by 3 percent next year. The following items vary directly with sales – current assets and short-term liabilities. The profit margin percentage remains constant.

How much is the external financing needed (EFN) to balance the projected Balance Sheet for next year?

Answer 1

EFN i.e.external funding needed = Increase in current assets - Increase in current liabilities - Increase in retained earnings
Increase in current assets = Present Current assets x sales growth % = $5100 x 3% = $153
Increase in current liabilities = Present current liabilities x sales growth % = $6200 x 3% = $186
Increase in retained earnings = Current sales x (1+sales growth %) x Profit Margin % x (1 - dividend payout ratio)
Increase in retained earnings = $47000 x (1+0.03) x 5% x (1 -0) = $2420.50
EFN i.e.external funding needed = $153 - $186 - $2420.50 = -$2,453.50