The Manning Company has financial statements as shown next, which are reprebenta

Question

The Manning Company has financial statements as shown next, which are reprebentative of the company's historical average. The firm is expecting a 35 percent increase in sales next year, and management is concened about the company's need for external funds. The increase in sales is expected to be carried out without any expansion of fixed assets, but rather through more efficient asset utilization in the existing store. Among liabilities, only current liabilities vary directly with sales Sales Eamings before interest and taxers Interest Earnings before taxes Taxes Eamings after taxes Dividends $ 200,000 155,800 44,200 8,100 38,100 16,100 20,000 7,000 Balance Sheet Assets Liabilities and Stockholders' Equity 20,000 1,750 4,250 26,000 8.100 20,500 115,000 21,400 5,000 Accounts payable Cash Accounts receivable 5,000 Accrued wages 60,000 Accrued taxes 100,000 Current Sablities Current assets Fixed assets 91,000 Notes payable Long-term debt Common stock Retained eanings Total liabilities and stockholdens' equily 191,000 191,000 Total assets Using the percent-of-sales method, determine whether the company has external financing income statement.) (Do not round intermediate calculations) needs, or a surplus of funds. (Hint A prott margin and payout ratio must be found from the frm needs n external funds

Explanation / Answer

1. Computation of External Funds Needed

Profit Margin = Earnings after tax / Sales = 20000 / 200000 = 10%

Payout Ratio = Dividends / Earnings after tax = $7000 / $20000 = 35%

Projected Sales = Current Sales * ( 1 + Increase in Sales)

Projected Sales = $200000 * ( 1 + 0.35) = $270000

Change in Sales S' = $70000

External Funds Needed = Current Assets * Change in Sales / Current Sales - Current Liabilities * Change in Sales / Current Sales - Profit Margin * Projectedd Sales * (1 - Payout ratio)

External Funds Needed = $100000 * $70000 / $200000 - $26000 * $70000 / $200000 - 0.10 * $270000 * (1 - 0.35)

External Funds Needed = $35000 - $9100 - $17550

External Funds Needed = $8350

The Firm needs $8350 in external funds

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