An ambitious company, Kentag wants to be a fortune 500 company within 20 years.

Question

An ambitious company, Kentag wants to be a fortune 500 company within 20 years. It expects its sales to increase 20% next year from its current level of $4.7 million. Kentag has current assets of $660,000, net fixed assets of $1.5 million, and current liabilities of $462,000. All assets are expected to grow proportionately with sales. If Kentag has a net profit margin of 10%, what additional financing will be needed to support the increase in sales? As it is completely focused on growth and trying to make it to the Fortune 500 list, Kentag does not pay dividends. $339,600 $283,200 No financing needed, surplus of $224,400 No financing needed, surplus of $524,400

Explanation / Answer

Aditional financing needed = Increase in total assets - Increase in total liabilities - Increase in retained earnings

= ($660,000 + $1,500,000) * 20% - $462,000 * 20% - (1+20%) * 10% * $4,700,000

= -$224,400

Therefore, No financing needed, surplus of $224,400

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