Question

XYZ Company has assets that are traditionally 85% of sales, and its liabilities traditionally are 50% of sales. Sales for this year are $50,000 and sales for next year are projected to be $150,000 with a profit margin of 10%. No owner payout will be taken. Using the percentage of sales method, XYZ will need ________ of additional financing. A. 15,000 B. 52,500 C. 70,000 D 20,000 E. No financing is required

Answer 1

D) $20,000

explanation:

Initial sale = 50,000

Assets = 85% × 50,000 = 42,500

Liability = 50% × 50,000 = 25,000

Equity = assets - liability

= 42,500 - 25,000

= 17,500

Projected values

Change in sales = 150,000 - 50,000 = $100,000

Total new liability = 50% of sale

= 50% × 150,000

= 75,000

New asset = 85% × 150,000

= 127,500

New equity = Asset - liability

= 127,500 - 75,000

= 52,500

Total financing needed = New equity - profit margin - old equity

= 52,500 - ( 10% × 150,000 ) - 17,500

= 52,500 - 15,000 - 17,500

= $20,000