Question

In: Finance

28) The additional funds needed by the firm can be calculated by assuming which of the...

28) The additional funds needed by the firm can be calculated by assuming which of the following?


A) The firm's additional sales will grow proportionately as assets are purchased.
B) The firm's additional capital needed will grow proportionately with projected changes in sales.
C) The firm's balance sheet will grow proportionately with projected changes in sales.
D) The firm's additional sales will grow proportionately as capital is brought on to the balance sheet.

Solutions

Expert Solution

The additional funds are needed by the firm to accomplish the increased projected sales. For achieving this target, they need to purchase an additional asset or incur capital expenditure by increasing their liabilities to increase their productive capacity.

As assets are purchased and liabilities incurred, balance sheet position of the firm changes.

For an example, if a firm's current financial position is as follows:

Assets = $10,000

Liabilities = $15,000

Net income = $5,000

Sales = $20,000

Now, let us suppose firm is expecting to expand and now projected sales = $30,000.

Subsequently, for $10,000 increase in sales, the company has to increase it's production capacity. For that, they borrow $4,000 and purchase an additional assets worth $3,000 and spends $1,000 for other expenses.

The change in firm's balance sheet will be as follows:

Assets = $13,000

Liabilities = $19,000

Net income = $5,000 - $1,000 + $10,000 = $14,000.

Thus, Option (C) is correct. The firm's balance sheet will grow proportionately with projected changes in sales as additional finance is needed.

Hope it helps. Thankyou

jeff jeffy answered 8 months ago
Next > < Previous

Related Solutions

1. With a full capacity, the need of additional funds of a firm is reduced by...
1. With a full capacity, the need of additional funds of a firm is reduced by a) Spontaneous growth of current liabilities b) Spontaneous growth of current assets c) A sharp increase in forecasted sales d) A moderate growth of dividends 2. For any positive growth in forecasted sales, which of the following firm will most likely require no immediate financing? a) Firms with short production cycles b) Firms with an under-utilization of its fixed assets c) Firms with a...
When a firm needs to raise additional funds, it can potentially obtain them from 3 different...
When a firm needs to raise additional funds, it can potentially obtain them from 3 different sources: external debt, external equity, and internal sources of cash. Based on the pecking order theory, in what order would a firm raise money from these three sources? Why?
Additional Funds Needed The Booth Company's sales are forecasted to double from $1,000 in 2016 to...
Additional Funds Needed The Booth Company's sales are forecasted to double from $1,000 in 2016 to $2,000 in 2017. Here is the December 31, 2016, balance sheet: Cash $  100 Accounts payable $   50 Accounts receivable 200 Notes payable 150 Inventories 200 Accruals 50 Net fixed assets 500 Long-term debt 400 Common stock 100 Retained earnings 250 Total assets $1000 Total liabilities and equity $1000 Booth's fixed assets were used to only 50% of capacity during 2016, but its current assets were...
Additional Funds Needed The Booth Company's sales are forecasted to double from $1,000 in 2016 to...
Additional Funds Needed The Booth Company's sales are forecasted to double from $1,000 in 2016 to $2,000 in 2017. Here is the December 31, 2016, balance sheet: Cash $  100 Accounts payable $   50 Accounts receivable 200 Notes payable 150 Inventories 200 Accruals 50 Net fixed assets 500 Long-term debt 400 Common stock 100 Retained earnings 250 Total assets $1000 Total liabilities and equity $1000 Booth's fixed assets were used to only 50% of capacity during 2016, but its current assets were...
Additional Funds Needed The Booth Company's sales are forecasted to double from $1,000 in 2018 to...
Additional Funds Needed The Booth Company's sales are forecasted to double from $1,000 in 2018 to $2,000 in 2019. Here is the December 31, 2018, balance sheet: Cash $  100 Accounts payable $   50 Accounts receivable 200 Notes payable 150 Inventories 200 Accruals 50 Net fixed assets 500 Long-term debt 400 Common stock 100 Retained earnings 250 Total assets $1,000 Total liabilities and equity $1,000 Booth's fixed assets were used to only 50% of capacity during 2018, but its current assets were...
Additional Funds Needed The Booth Company's sales are forecasted to double from $1,000 in 2018 to...
Additional Funds Needed The Booth Company's sales are forecasted to double from $1,000 in 2018 to $2,000 in 2019. Here is the December 31, 2018, balance sheet: Cash $  100 Accounts payable $   50 Accounts receivable 200 Notes payable 150 Inventories 200 Accruals 50 Net fixed assets 500 Long-term debt 400 Common stock 100 Retained earnings 250 Total assets $1,000 Total liabilities and equity $1,000 Booth's fixed assets were used to only 50% of capacity during 2018, but its current assets were...
Additional Funds Needed The Booth Company's sales are forecasted to double from $1,000 in 2016 to...
Additional Funds Needed The Booth Company's sales are forecasted to double from $1,000 in 2016 to $2,000 in 2017. Here is the December 31, 2016, balance sheet: Cash $  100 Accounts payable $   50 Accounts receivable 200 Notes payable 150 Inventories 200 Accruals 50 Net fixed assets 500 Long-term debt 400 Common stock 100 Retained earnings 250 Total assets $1000 Total liabilities and equity $1000 Booth's fixed assets were used to only 50% of capacity during 2016, but its current assets were...
Additional Funds Needed The Booth Company's sales are forecasted to double from $1,000 in 2016 to...
Additional Funds Needed The Booth Company's sales are forecasted to double from $1,000 in 2016 to $2,000 in 2017. Here is the December 31, 2016, balance sheet: Cash $ 100 Accounts payable $ 50 Accounts receivable 200 Notes payable 150 Inventories 200 Accruals 50 Net fixed assets 500 Long-term debt 400 Common stock 100 Retained earnings 250 Total assets $1000 Total liabilities and equity $1000 Booth's fixed assets were used to only 50% of capacity during 2016, but its current...
Additional Funds Needed The Booth Company's sales are forecasted to double from $1,000 in 2016 to...
Additional Funds Needed The Booth Company's sales are forecasted to double from $1,000 in 2016 to $2,000 in 2017. Here is the December 31, 2016, balance sheet: Cash $ 100 Accounts payable $ 50 Accounts receivable 200    Notes payable 150 Inventories 200 Accruals 50 Net fixed assets 500 Long-term debt 400 Common stock 100 Retained earnings 250 Total assets $1000 Total liabilities and equity $1000 Booth's fixed assets were used to only 50% of capacity during 2016, but its...
Additional Funds Needed The Booth Company's sales are forecasted to double from $1,000 in 2016 to...
Additional Funds Needed The Booth Company's sales are forecasted to double from $1,000 in 2016 to $2,000 in 2017. Here is the December 31, 2016, balance sheet: Cash $ 100 Accounts payable $ 50 Accounts receivable 200 Notes payable 150 Inventories 200 Accruals 50 Net fixed assets 500 Long-term debt 400 Common stock 100 Retained earnings 250 Total assets $1000 Total liabilities and equity $1000 Booth's fixed assets were used to only 50% of capacity during 2016, but its current...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT