Question

Problem 15-6 Additional Funds Needed (LG15-4) Suppose that Wind Em Corp. currently has the balance sheet shown below, and that sales for the year just ended were $6.4 million. The firm also has a profit margin of 20 percent, a retention ratio of 25 percent, and expects sales of $7.4 million next year. Assets Liabilities and Equity Current assets $ 1,616,000 Current liabilities $ 1,804,800 Fixed assets 4,400,000 Long-term debt 1,800,000 Equity 2,411,200 Total assets $ 6,016,000 Total liabilities and equity $ 6,016,000 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 :

Calculation of Additinal Funds :

Additional Funds Needed = Increase in Assets - Addition to Retained Earnings - Increase in Liabilities

Growth rate of sales = (Sales in next year - Sales in current year) / Sales in current year

= (7.4 million - 6.4 million) / 6.4 million

= 1 million / 6.4 million

= 15.625% or 0.15625

Increase in assets = Total Assets * Growth rate

= 6,016,000 * 0.15625

= 940,000

Increase in Liabilities = Current Liabilities * Growth rate

= 1804800 * 0.15625

= 282,000

Addition to retained Earning = Profits Earned * Retention ratio

= (Next year sales * Profit margin) * 0.25

= (7,400,000 * 0.20) * 0.25

= 370,000

Additional Funds Needed = Increase in Assets - Addition to Retained Earnings - Increase in Liabilities

= 940,000 - 370,000 - 282,000

= $288,000