Question

A firm has total assets of $162,000, long-term debt of $46,000, stockholders' equity of $95,000, and current liabilities of $21,000. The dividend payout ratio is 60 percent and the profit margin is 8 percent. Assume all assets and current liabilities change spontaneously with sales and the firm is currently operating at full capacity. What is the external financing need if the current sales of $150,000 are projected to increase by 10 percent

Answer 1

Answer:

$8,820

Explanation:

The percentage of sales formula for computing the funding requirement is stated thus:

AFN = (A/S) x (Δ Sales) - (L/S) x (Δ Sales) - (PM x FS x retention ratio)

AFN=additional funds=unknown

A-current level of total assets=$162,000

S- current sales $150,000

=Δ Sales=Change in sales=increase in sales=$150,000*10%=$15000

L-spontaneous liabilities=current liabilities=$21,000

PM-profit margin =8%

retention ratio=1-dividend payout ratio=1-60%=40%

FS-forecast sales =$150,000+$15000=$165,000

AFN =($162,000/$150,000)*$15000))-($21,000/$150,000)*$15000-(8%*$165,000*40%)

AFN =$16,200-$2,100-$5280

AFN=$8,820