Question

Suppose that Wind Em Corp. currently has the balance sheet shown below, and that sales for the year just ended were $6.9 million. The firm also has a profit margin of 30 percent, a retention ratio of 20 percent, and expects sales of $7.9 million next year. Assets Liabilities and Equity Current assets $ 1,931,000 Current liabilities $ 2,390,850 Fixed assets 4,900,000 Long-term debt 1,550,000 Equity 2,890,150 Total assets $ 6,831,000 Total liabilities and equity $ 6,831,000 If all assets and current liabilities are expected to grow with sales, what amount of additional funds will Wind Em need from external sources to fund the expected growth? (Enter your answer in dollars not in millions.)

Answer 1

Answer:

Current Sales = $6,900,000
Expected Sales = $7,900,000
Increase in Sales = ($7,900,000 - $6,900,000) / $6,900,000 * 100
Increase in Sales = 14.49275%

Addition to Retained Earnings = Expected Sales * Profit Margin * Retention Ratio
Addition to Retained Earnings = $7,900,000 * 30% * 20%
Addition to Retained Earnings = $474,000

Increase in Total Assets = $6,831,000 * 14.49275%
Increase in Total Assets = $990,000

Increase in Current Liabilities = $2,390,850 * 14.49275%
Increase in Current Liabilities = $346,500

Additional Fund Needed = Increase in Total Assets - Increase in Spontaneous Current Liabilities - Addition to Retained Earnings
Additional Fund Needed = $990,000 - $346,500 - $474,000
Additional Fund Needed = $169,500