Question

Bright Slope Corp. has provided the following information:Balance SheetCash $ 10,000 Accounts Payable $ 5,000Marketable Securities 5,000 Accruals 2,000Accounts Receivable 25,000 Notes Payable (8%) 12,000Inventory 35,000 Total Current 19,000 Total Current 75,000 Long-Term Debt (10%) 48,000Net Fixed Assets 80,000 Common Stock 32,000 Retained Earnings 56,000Total Assets $155,000 Total L&E $155,000Current year sales $100,000Current year Net Income $7,500Current year dividends $3,000Consider the following additional information:Expected sales grow next year is $20,000Fixed assets will increase by $12,000, net of depreciationMarketable securities will not change.The short term notes payable will be rolled over.The company will maintain its current profit margin and dividend payout ratio,(6 points) Compute Bright Slope’s Additional Funds needed.(4 points) Explain the effect of Bright Slope’s management of working capital.

Answer 1

Answer:

Answer : Retained earning = 61400

Explanation:

Sales next year (100000+20000) = 120000  

Increase in sales = 120000-100000/100000= 20%

Current profit margin = 7500/100000= 7.5%

Dividend Payout ratio = Dividend / net jncome = 3000/7500 = 40%

New profit margin = 120000 x 7.5% =9000

New Dividend = 9000 x40% = 3600

Performance Balance sheet

Cash 10000(1+0.2)                                         12000

Marketible securities (no change)                5000

Account Receivable 25000(1+0.02)                30000

Inventory 35000(1+0.02)                                42000

Total Current Asset                                        89000

Net Fixed Asset (80000+12000)                         92000

Total Asset                                                        181000

Accounts payable 5000(1+.02)                         6000

Accruals 2000(1+.02)                                         2400

Notes Payable 8% (no change as rolled over) 12000

Total Current Liabilities                                         20400

Long Term Debt 10%                                         48000

Common stock                                                 32000

Retained Earning                                                 61400

Balancing figure (additional funding)                 19200

                                                                               181000

Retained earning = Old balance + (Current year net income - dividend paid)  

                                56000+ ( 9000-3600) =61400

2) changes in working capital.

Working capital means Current asset - current liabilities  

Earlier it was 75000 - 19000 = 56000

Now its 89000 - 20400 = 68600

Working capital has been increased by 68600 - 56000 =12600

(working capital is the amount needed to run business day to day activities.)

Although sales increased by 20% but working capital doesn't increase by 20% because payable were rolled over. So its bad management as company management is expanding its businesses not from current business retained earning but by deferring payables