Suppose that Wall-E Corp. currently has the balance sheet shown below, and that

Question

Suppose that Wall-E Corp. currently has the balance sheet shown below, and that sales for the year just ended were $6.1 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. Fixed assets are currently fully utilized, and the nature of Wall-E’s fixed assets is such that they must be added in $1 million increments. Assets Liabilities and Equity Current assets $ 1,769,000 Current liabilities $ 1,708,000 Fixed assets 4,087,000 Long-term debt 1,950,000 Equity 2,198,000 Total assets $ 5,856,000 Total liabilities and equity $ 5,856,000 If current assets and current liabilities are expected to grow with sales, what amount of additional funds will Wall-E need from external sources to fund the expected growth? (Enter your answer in dollars not in millions.)

Explanation / Answer

Solution:

In this case, the necessary increase in assets will be based on only CA

Necessary increase in current assets = A*/S0.S

Necessary increase in current assets = $1,769,000/$6,100,000*($8,100,000 - $6,100,000)

Necessary increase in current assets = $580,000

The spontaneous increase in liabilities will be:

Spontaneous liabilities = L*/S0.S

Spontaneous liabilities = $1,708,000/$6,100,000*($8,100,000 - $6,100,000)

Spontaneous liabilities = $560,000

Necessary increase in fixed assets = A*/S0.S

Necessary increase in fixed assets = $4,087,000/$6,100,000*($8,100,000 - $6,100,000)

Necessary increase in fixed assets = $1,340,000

The necessary increase in fixed assets is $1,340,000. However, fixed assets must be added in $1 million increments. Thus, the asset need for fixed assets must be increased to$2 million

The projected increase in retained earnings will be

Projected increase in retained earnings = 0.20*$8,100,000*0.25 = $405,000

So AFN will be = $580,000 + $2,000,000 - $560,000 - $405,000

AFN = $1,615,000

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