Question

The Manning Company has financial statements as shown next, which are representative of the company’s historical average.

The firm is expecting a 30 percent increase in sales next year, and management is concerned about the company’s need for external funds. The increase in sales is expected to be carried out without any expansion of fixed assets, but rather through more efficient asset utilization in the existing store. Among liabilities, only current liabilities vary directly with sales.

  

Income Statement
Sales	$	290,000
Expenses		240,800
Earnings before interest and taxes	$	49,200
Interest		9,000
Earnings before taxes	$	40,200
Taxes		17,000
Earnings after taxes	$	23,200
Dividends	$	8,120

  

Balance Sheet
Assets			Liabilities and Stockholders' Equity
Cash	$	8,000	Accounts payable	$	25,000
Accounts receivable		45,000	Accrued wages		2,200
Inventory		63,000	Accrued taxes		4,700
Current assets	$	116,000	Current liabilities	$	31,900
Fixed assets		85,000	Notes payable		9,000
			Long-term debt		25,000
			Common stock		124,000
			Retained earnings		11,100
Total assets	$	201,000	Total liabilities and stockholders' equity	$	201,000

  

Using the percent-of-sales method, determine whether the company has external financing needs, or a surplus of funds. (Hint: A profit margin and payout ratio must be found from the income statement.) (Do not round intermediate calculations.)

Answer 1

	Profit Margin =		EAT/ Sales x 100 =		40200/290000 x 100 =	13.9%
	Payout Ratio =		Dividend/ EAT 8 100 =		8120/40200 x 100 =	20.2%
	Change in sales =		290000 x 30% =		87000
	Increase in Available internal funds next year =
		Additional sales -		87000
		Additional profit	87000 x 13.9%	12060
		Retained earnings	12060 x (1 - 0.202)	9624
	Now calulate additional funds requirement due to increase in sales -
	Current assets =		116000/290000 x 87000 =			34800
	Current liabilities =		31900/290000 x 87000 =			9570
		Increase in net working capital =				25230
		Less: Retained earnings (Increased due to change in sales)				9624
		External fundings required =				15606