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question 32 Given the following information: current assets = $400; fixed assets = $400; long-term debt...

question 32

Given the following information: current assets = $400; fixed assets = $400; long-term debt = $455; equity = $300; sales = $470; costs = $400; tax rate = 34%. Suppose that assets and costs maintain a constant ratio to sales. What is the total external financing needed if sales increase 25%? Assume the firm pays no dividends.

Select one:

a. $143.75

b. $142.25

c. $183.75

d. $167.25

e. $380.25

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Homework Answers

Answer #1

b. $142.25

Working:

Increase in Assets = (Current Assets + Fixed Assets)*Increase ratio
= (400+400)*25%
= $        200
Existing:
Sales $ 470.00
Costs $ 400.00
Profit before tax $    70.00
Tax $    23.80
Net Income $    46.20
Increased Net Income $    46.20 x 125% = $    57.75
External Financing Needeed = Increase in Assets - Retained Income
= $        200 - $    57.75
= $ 142.25
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