Owen’s Electronics has nine operating plants in seven southwestern states. Sales
ID: 2811419 • Letter: O
Question
Owen’s Electronics has nine operating plants in seven southwestern states. Sales for last year were $100 million, and the balance sheet at year-end is similar in percentage of sales to that of previous years (and this will continue in the future). All assets (including fixed assets) and current liabilities will vary directly with sales. The firm is working at full capacity.
Owen’s has an aftertax profit margin of 9 percent and a dividend payout ratio of 40 percent.
If sales grow by 30 percent next year, determine how many dollars of new funds are needed to finance the growth. (Do not round intermediate calculations. Enter your answer in dollars, not millions, (e.g., $1,234,567).)
Balance Sheet(in $ millions) Assets Liabilities and Stockholders' Equity Cash $ 12 Accounts payable $ 22 Accounts receivable 27 Accrued wages 9 Inventory 28 Accrued taxes 11 Current assets $ 67 Current liabilities $ 42 Fixed assets 45 Notes payable 16 Common stock 19 Retained earnings 35 Total assets $ 112 Total liabilities and stockholders' equity $ 112
Explanation / Answer
Owen’s Electronics (All figures are in $ millions)
Additional funds needed = increase in assets ? increase in liabilities – increase in retained earnings
Increase in assets =Last year’s assets *sales growth rate= $112*30% = $33.6
Increase in liabilities = Last year’s liabilities*sales growth rate= $42*30% = $12.6
Increase in retained earnings = Current year sales * profit margin - retention rate =$100*130%*9%*60% = $7.02
Additional funds needed =$33.6-$12.6-$7.02 = $13.98
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