The Manning Company has financial statements as shown next, which are representa
ID: 2814222 • Letter: T
Question
The Manning Company has financial statements as shown next, which are representative of the company’s historical average.
The firm is expecting a 35 percent increase in sales next year, and management is concerned 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.
Income Statement
Sales $ 200,000
Expenses 155,800
Earnings before interest and taxes $ 44,200
Interest 8,100
Earnings before taxes $ 36,100
Taxes 16,100
Earnings after taxes $ 20,000
Dividends $ 7,000
Balance Sheet
Assets Liabilities and Stockholders' Equity
Cash $ 5,000 Accounts payable $ 20,000
Accounts receivable 35,000 Accrued wages 1,750
Inventory 60,000 Accrued taxes 4,250
Current assets $ 100,000 Current liabilities $ 26,000
Fixed assets 91,000 Notes payable 8,100
Long-term debt 20,500
Common stock 115,000
Retained earnings 21,400
Total assets $ 191,000 Total liabilities and stockholders' equity $ 191,000
Using the percent-of-sales method, determine whether the company has external financing needs, or a surplus of funds. (Hint: A profit margin and payout ratio must be found from the income statement.) (Do not round intermediate calculations.)
The Firm ___(Needs or Has), _______, ______ (In external Funds or In Surplus 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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