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 $7.6 million. The firm also has a profit margin of 25 percent, a retention ratio of 30 percent, and expects sales of $9.6 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 $ 2,508,000 Current liabilities $ 2,280,000 Fixed assets 5,700,000 Long-term debt 1,800,000 Equity 4,128,000 Total assets $ 8,208,000 Total liabilities and equity $ 8,208,000 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.)
Not $840,000.00

Explanation / Answer

AFN = (A*/S0)S – (L*/S0) S – M(S1)(RR)

where, A* - Total Assets = 8,208,000, S0 = Last-year sales = 7,600,000, S = 2,000,000, L* - Current Liabilities = 2,280,000, M - Profit Margin = 25%, S1 - Next year sales = 2,000,000, RR - Retention Ratio

Total funds required = (A*/S0)S = 8,208,000 / 7,600,000 x 2,000,000 = 2,160,000

However, assets must be added in increments of $1 million. Hence, total funds required = $3,000,000

Hence, AFN = 3,000,000 - 2,280,000 / 7,600,000 x 2,000,000 - 25% x 9,600,000 x 30%

= $1,680,000

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