Question

LM Products has total assets of $48,900, total debt of $21,750, long-term debt of $18,100, owners' equity of $27,150, dividends paid of $1,925, and net income of $5,500. Assume net working capital and all company costs increase directly with sales. Also assume the tax rate and the dividend payout ratio are constant and the company is currently operating at full capacity.
a. What is the external financing need if sales increase by 4 percent?

Answer 1

Answer:

-$1,908

Explanation:

Current liabilities:

= Total debt - Long term debt

= $21,750 - $18,100

= $3,650

Retained earnings:

= Net income - Dividend

= $5,500 - $1,925

= $3,575

Increase in assets:

= Total assets × Percentage increase in sales

= $48,900 × 4%

= $1,956

Increase in liabilities:

= Current liabilities × Percentage increase in sales

= $3,650 × 4%

= $146

Increase in retained earnings:

= Retained earnings × (1 + 4%)

= $3,575 × 1.04

= $3,718

Therefore,

External financing need:

= Increase in assets - Increase in liabilities - Increase in retained earnings

= $1,956 - $146 - $3,718

= -$1,908