Question

CCC currently has sales of $26,000,000 and projects sales of $32,500,000 for next year. The firm's current assets equal $10,000,000 while its fixed assets are $9,000,000. The best estimate is that current assets will rise directly with sales while fixed assets will rise by $500,000. The firm presently has $5,000,000 in accounts payable, $3,500,000 in long-term debt, and $10,500,000 in common equity. All current liabilities are expected to change directly with sales. CCC plans to pay $900,000 in dividends next year and has a 5.0% net profit margin. What are the company's additional funds needed for the next year? (Round your answer to the nearest dollar.)

Answer 1

Answer: $1,025,000

Explanation:

Given that,

Current sales = $26,000,000

Projects sales = $32,500,000

Current assets = $10,000,000

Fixed assets = $9,000,000

Fixed assets will rise by $500,000

Accounts payable = $5,000,000

Long-term debt = $3,500,000

Common equity = $10,500,000

dividends = $900,000

net profit margin = 5%

Additional Funds Needed(AFN) can be calculated with the use of following formula:

AFN:

= $[(\frac{Current assets}{sales})\times(Revised\ Sales) + Revised\ Fixed\ Assets] - [(\frac{Spontaneous liabilities}{sales} )\times(Revised\ Sales) + Long\ Term\ Debt] - [Current\ Equity + Revised\ Net\ Income - Dividends]$

= $[(\frac{10,000,000}{26,000,000})\times(32,500,000) + (9,000,000 + 500,000)] - [(\frac{5,000,000}{26,000,000} )\times(32,500,000) + 3,500,000] - [10,500,000 + 5%\times32,500,000 - 900,000]$

= $22,000,000 - $9,750,000 - $11,225,000

= $1,025,000