Question

# A firm has sales of \$4,100, net income of \$640, total assets of \$14,700, and total...

A firm has sales of \$4,100, net income of \$640, total assets of \$14,700, and total debt of \$10,600. Assets and costs are proportional to sales. Debt and equity are not. No dividends or taxes are paid. Next year's sales are projected to be \$5,969. What is the amount of the external financing needed?

 \$5,769 \$5,519 \$6,049 \$5,894 \$5,639

given for current year

sales = \$4100

net income = \$640

total assets = \$14700

total debt of \$10600

So, current year equity = total assets - debt = 14700-10600 = \$4100

Next year Sales = \$5969

So, increase in sales = (5969-4100)/4100 = 45.59%

So, total asset also increased by same rate,

Next year total assets = 14700*(1.4559) = \$21401.05

Similarly net year net income = 640*1.4559 = \$931.75

Since company did not paid any dividend, whole of the net income will be added to equity next year.

So, next year equity = 4100 + 931.75 = \$5031.75

So, next year debt = next year assets - next year equity = 21401.05 - 5031.75 = \$16369.30

So, external finance needed = new debt level - current year debt = 16369.30 - 10600 = \$5769.30

So, external finance needed next year is approx \$5769

Option A is correct.

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