Question

A firm has sales of $63,000, current assets of $13,000, current liabilities of $14,500, net fixed assets of $74,000, and a profit margin of 7.50%. The firm has no long-term debt and does not plan on acquiring any. The firm does not pay any dividends. Sales are expected to increase by 4% next year. If all assets, short-term liabilities, and costs vary directly with sales, how much additional equity financing is required for next year?

A. $4,914

B. $2,000

C. $4,725

D. $2,900

Answer 1

Current Year:

Sales = $63,000
Current Assets = $13,000
Current Liabilities = $14,500
Net Fixed Assets = $74,000
Profit Margin = 7.50%

Total Assets = Current Assets + Net Fixed Assets
Total Assets = $13,000 + $74,000
Total Assets = $87,000

Next Year:

Growth Rate = 4%

Sales = $63,000 * 1.04
Sales = $65,520

Net Income = Sales * Profit Margin
Net Income = $65,520 * 7.50%
Net Income = $4,914

Additions to Retained Earnings = Net Income
Additions to Retained Earnings = $4,914

Increase in Total Assets = $87,000 * 0.04
Increase in Total Assets = $3,480

Increase in Current Liabilities = $14,500 * 0.04
Increase in Current Liabilities = $580

Additional Equity Financing = Increase in Total Assets - Increase in Current Liabilities - Additions to Retained Earnings
Additional Equity Financing = $3,480 - $580 - $4,914
Additional Equity Financing = -$2,014