Suppose that Wall-E Corp. currently has the balance sheet shown below, and that

Question

Suppose that Wall-E Corp. currently has the balance sheet shown below, and that sales for the year just ended were $6.0 million. The firm also has a profit margin of 30 percent, a retention ratio of 20 percent, and expects sales of $8.0 million next year. Fixed assets are currently fully utilized, and the nature of Wall-E’s fixed assets is such that they must be added in $1 million increments.

Assets Liabilities and Equity   Current assets $ 1,800,000 Current liabilities $ 1,620,000   Fixed assets 3,960,000 Long-term debt 2,000,000 Equity 2,140,000   Total assets $ 5,760,000 Total liabilities and equity $ 5,760,000 If current assets and current liabilities are expected to grow with sales, what amount of additional funds will Wall-E need from external sources to fund the expected growth?

Explanation / Answer

Sales Growth % = Increase in sales / Current sales = $2 million / $6 million = 33.33% Expected current assets = $1800000 * (1+0.3333) = $24,00,000 Expected Current liabilities = $1620000 * (1+0.3333) = $21,60,000 Expected Fixed assets = $3960000 + $1000000 = $49,60,000 Increase in retained earnings = Expected sales * Profit Margin * retention ratio Increase in retained earnings = $80,00,000 * 30% * 20% = $4,80,000 Expected Equity = $21,40,000 + $4,80,000 = $26,20,000 Calculation of additional funds needed to fund the expected growth Expected Current assets $2,400,000.00 Expected Fixed assets $4,960,000.00 Total Expected Assets $7,360,000.00 Less : Expected current liabilities $2,160,000.00 Less : Current long term debt $2,000,000.00 Less : Expected Equity $2,620,000.00 Additional Funds Needed $580,000.00

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.