Question

Suppose that Wind Em Corp. currently has the balance sheet shown below, and that sales for the year just ended were $6.4 million. The firm also has a profit margin of 20 percent, a retention ratio of 25 percent, and expects sales of $7.4 million next year. Assets Liabilities and Equity Current assets $ 1,616,000 Current liabilities $ 1,804,800 Fixed assets 4,400,000 Long-term debt 1,800,000 Equity 2,411,200 Total assets $ 6,016,000 Total liabilities and equity $ 6,016,000 If all assets and current liabilities are expected to grow with sales, what amount of additional funds will Wind Em need from external sources to fund the expected growth? (Enter your answer in dollars not in millions.)

Answer 1

Answer:

Additional Fund Needed = Projected Increase in Assets – Spontaneous Increase in Liabilities – Increase in Retained Earnings

Expected Growth Rate = ($7,400,000 - $6,400,000) / $6,400,000 * 100
Expected Growth Rate = 15.625%

Projected Increase in Assets = Assets * Sales Growth Rate
Projected Increase in Assets = $6,016,000 * 15.625%
Projected Increase in Assets = $940,000

Spontaneous Increase in Liabilities = Liabilities * Sales Growth Rate
Spontaneous Increase in Liabilities = $1,804,800 * 15.625%
Spontaneous Increase in Liabilities = $282,000

Increase in Retained Earning = Expected Sales * Profit Margin * Retention Rate
Increase in Retained Earning = $7,400,000 * 20% * 25%
Increase in Retained Earning = $370,000

Additional Fund Needed = $940,000 - $282,000 - $370,000
Additional Fund Needed = $288,000