Great Subs believes it can increase sales by 50% without any increase in net fix

Question

Great Subs believes it can increase sales by 50% without any increase in net fixed assets. Earnings after tax are expected to be $2,000. The company pays no dividends. What additional financing will Subs need to finance this growth? Subs’ balance sheet currently is as follows: Cash $ 2,500 Accounts Payable $ 5,600 Accounts Rec. 4,400 Notes Payable 10,000 Inventory 6,000 Long-term Debt 15,000 Fixed Assets, net 47,700 Stockholder’s Equity 30,000 $60,600 $60,600 a. $3,350 surplus -- no additional financing needed b. $1,650 c. $3,650 d. None of the answers is correct.

Explanation / Answer

If Great Subs wants to increase the sales by 50% without the increase in the fixed assets, then it has to increase the working capital with 50% as

increase in the current assets = 12900 * 50% = $6450

Increase in the current liability = 5600 * 50% = $2800

Increase in the retention of earnings = $2000 (no dividend payout)

So, total additional financing required =6450 - 2800 - 2000 = $1650

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