Suppose that Wind Em Corp. currently has the balance sheet shown below, and that

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.

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?

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.

Explanation / Answer

Increase in sales=($7.4 Million-$6.4 Milion)/$6.4 Milion=0.15625=15.625%

Increase in total Assets=$6,016,000*15.625%=$940,000

Total assets=$6,016,000+$940,000=$6,956,000

Increase in Current Liabilities=$1,804,800*15.625%=$282,000

Total current liabilities=$1,804,800+$282,000=$2,086,800

Profit margin on sales=20%

Profit=$7,400,000*20%=$1,480,000

so Retained profit=$1,480,000*25%=$370,000

so New equity=$2,411,200+$370,000=$2,781,200

Long-term debt=$1,800,000

Finally additional funds needed=Total Assets-New current Liabilities-New Equity-Old Long term debt

=$6,956,000-$2,086,800-$2,781,200-$1,800,000=$288,000

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