The 2015 financial statements for Growth Industries are presented below Sales an
ID: 2723237 • Letter: T
Question
The 2015 financial statements for Growth Industries are presented below Sales and costs in 2016 are projected to be 20% higher than in 2015. Both current assets and accounts payable are projected to rise in proportion to sales. The fixed assets of Growth Industries are operating at only 75% of capacity. Interest expense in 2016 will equal 10% of long-term debt outstanding at the start of the year. The firm will maintain a dividend payout ratio of 40. What is the required external financing over the next year? Even if sales increase by 20%, the firm still has more than enough fixed assets to meet production. Only working capital will increase. Net working capital of the firm in 2015 was $. The increase in net working capital will be $ which is less than the increase in the retained earnings. Thus required external financing is $. A negative external financing value indicates the firm will generate more cash than it needs to finance the projected growth. This extra cash can be used to reduce debt, repurchases shares, increase cash reserves, or fund future growth. The extra cash was primarily due to the firm's excess production capacity.Explanation / Answer
2015 Cash 8000 AR 13000 Inventorries 39000 Total current asset 60000 CL 15000 Net working capital 45000 2016 Cash 9600 AR 15600 Inventorries 46800 Total current asset 72000 CL 18000 Net working capital 54000 increase of 9000 increase of 20%
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