Question

Owen’s Electronics has nine operating plants in seven southwestern states. Sales for last year were $100 million, and the balance sheet at year-end is similar in percentage of sales to that of previous years (and this will continue in the future). All assets (including fixed assets) and current liabilities will vary directly with sales. The firm is working at full capacity.

Balance Sheet (in $ millions)
Assets			Liabilities and Stockholders' Equity
Cash	$	12	Accounts payable	$	22
Accounts receivable		27	Accrued wages		9
Inventory		28	Accrued taxes		11
Current assets	$	67	Current liabilities	$	42
Fixed assets		45	Notes payable		16
			Common stock		19
			Retained earnings		35
Total assets	$	112	Total liabilities and stockholders' equity	$	112

Owen’s has an aftertax profit margin of 9 percent and a dividend payout ratio of 40 percent.

If sales grow by 30 percent next year, determine how many dollars of new funds are needed to finance the growth. (Do not round intermediate calculations. Enter your answer in dollars, not millions, (e.g., $1,234,567).)

Answer 1

Owen’s Electronics (All figures are in $ millions)

Additional funds needed = increase in assets ? increase in liabilities – increase in retained earnings

Increase in assets =Last year’s assets *sales growth rate= $112*30% = $33.6

Increase in liabilities = Last year’s liabilities*sales growth rate= $42*30% = $12.6

Increase in retained earnings = Current year sales * profit margin - retention rate =$100*130%*9%*60% = $7.02

Additional funds needed =$33.6-$12.6-$7.02 = $13.98