Suppose that Psy Ops Industries currently has the balance sheet shown below, and

Question

Suppose that Psy Ops Industries currently has the balance sheet shown below, and that sales for the year just ended were $5.1 million. The firm also has a profit margin of 20 percent, a retention ratio of 25 percent, and expects sales of $8.1 million next year. Assets Liabilities and Equity Current assets $ 2,091,000 Current liabilities $ 1,581,000 Fixed assets 4,050,000 Long-term debt 1,550,000 Equity 3,010,000 Total assets $ 6,141,000 Total liabilities and equity $ 6,141,000 If fixed assets have enough capacity to cover the increase in sales and all other assets and current liabilities are expected to increase with sales, what amount of additional funds will Psy Ops need from external sources to fund the expected growth? (Enter your answer in dollars not in millions. Negative amount should be indicated by a minus sign.)

Explanation / Answer

Solution.

Calculation for additional fund needed.

Formula:-

AFN = Projected increase in assets – spontaneous increase in liabilities – any increase in retained earnings.
=

Increase in assets = assets × sales growth rate = $2,091,000 × 59% = $1,233,690

Spontaneous increase in liabilities = liabilities × sales growth rate = $1,581,000 × 59% = $932,790

Increase in retained earnings = sales × profit margin × retention rate

= sales × (1 + sales growth rate) × profit margin × retention rate

= $5,100,000 × (1 + 59%) × 20% × 25% = $405,000

Plugging all the figures gives us a figure of $0.272 billion.

Additional funds needed = $1,233,690 – $932,790 $405,000 = -$104,100

TransWorld must raise $104,100 to finance the increased level of sales.

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