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 6 months ago
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