Question

Your firm has sales of $47,000, current assets of $5,100, current liabilities of $6,200, net fixed assets of $51,500, and a profit margin of 5 percent. The firm has no long-term debt and does not plan on acquiring any. The firm does not pay any dividends. Sales are expected to increase by 7 percent next year. If all assets, short-term liabilities, and costs vary directly with sales, how much additional equity financing is required for next year

Answer 1

Answer:

$1,013.50

Explanation:

Projected assets = (Current assets + Fixed assets) * 1.10

Projected assets = ($5,100 + $51,500) * 1.07

Projected assets = $60,562

Projected liabilities = Current liabilities  * 1.07 = $6,200 * 1.07 = $6,634

Current equity = Current assets + Fixed assets - Current liabilities = $5,100 +  $51,500 - $6,200 = $50,400

Projected increase in retained earnings = Sales * 5% * 1.07 = $47,000 * 5% * 1.07 = $2,514.50

Equity funding need = Projected assets  - Projected liabilities  -  Current equity - Projected increase in retained earnings

Equity funding need = $60,562 - $6,634 - $50,400 - 2,514.50

Equity funding need = $1,013.50

So therefore, the equity funding need is $1,013.50