Question

Suppose that Wall-E Corp. currently has the balance sheet shown below, and that sales for the year just ended were $6.7 million. The firm also has a profit margin of 20 percent, a retention ratio of 25 percent, and expects sales of $8.7 million next year. Fixed assets are currently fully utilized, and the nature of Wall-E’s fixed assets is such that they must be added in $1 million increments.

Assets				Liabilities and Equity
Current assets	$	1,541,000		Current liabilities	$	2,278,000
Fixed assets		4,489,000		Long-term debt		1,650,000
				Equity		2,102,000
Total assets	$	6,030,000		Total liabilities and equity	$	6,030,000

If current assets and current liabilities are expected to grow with sales, what amount of additional funds will Wall-E need from external sources to fund the expected growth?

Answer 1

% Increase in sales = ($8.7 m - $6.7 m) / $6.7 m = 0.29850746268 or 29.850746268%

Increase in current assets = $1,541,000 x 29.850746268% = $460,000

Increase in current liabilities = $2,278,000 x 29.850746268% = $680,000

Increase in fixed assets = $4,489,000 x 29.850746268% = $1,340,000 or $2,000,000 (since fixed assets are increased in $1,000,000 increments)

retaines earnings next year = Sales x Profit margin x retention ratio = $8,700,000 × 20% × 0.25 = $435,000

Additional funds required = Increase in current assets + Increase in fixed assets - Increase in current liabilities - Increase in retained earnings = $460,000 + $2,000,000 - $680,000 - $435,000 = $1,345,000