Question

The Manning Company has financial statements as shown next, which are representative of the company’s historical average. The firm is expecting a 35 percent increase in sales next year, and management is concerned about the company’s need for external funds. The increase in sales is expected to be carried out without any expansion of fixed assets, but rather through more efficient asset utilization in the existing store. Among liabilities, only current liabilities vary directly with sales. Income Statement Sales $ 250,000 Expenses 192,000 Earnings before interest and taxes $ 58,000 Interest 7,500 Earnings before taxes $ 50,500 Taxes 15,500 Earnings after taxes $ 35,000 Dividends $ 7,000 Balance Sheet Assets Liabilities and Stockholders' Equity Cash $ 8,500 Accounts payable $ 26,400 Accounts receivable 63,000 Accrued wages 2,350 Inventory 91,000 Accrued taxes 3,750 Current assets $ 162,500 Current liabilities $ 32,500 Fixed assets 85,000 Notes payable 7,500 Long-term debt 17,500 Common stock 125,000 Retained earnings 65,000 Total assets $ 247,500 Total liabilities and stockholders' equity $ 247,500 Using the percent-of-sales method, determine whether the company has external financing needs, or a surplus of funds. (Hint: A profit margin and payout ratio must be found from the income statement.) (Do not round intermediate calculations.) This is the last question in the assignment. To submit, use Alt + S. To access other questions, proceed to the question map button.

Answer 1

1. Firm's EFN relation ship can be constructed with following EFN formula

EFN = (A/S) x (Δ Sales) - (L/S) x (Δ Sales) - (PM x FS x (1-d))

Where

A / S: Assets that change given a change in sales, expressed as a percentage of sales.

ΔSales: Change in sales between the last reporting period and the forecasted sales.

L / S: Liabilities that change given a change in sales, expressed as a percentage of sales.

PM: Profit Margin on Sales; i.e. net income / sales.

FS: Forecasted Sales

d: dividend payout percent

(1 - d): Percent of earnings retained after paying out dividends; d is the dividend payout ratio.

In the given situation

A / S= 247500/250000=0.99

L/S = total current liability (32500/250000)=0.13

Change in sale= 250000-337500=87500

Profit margin= 35000/250000= 0.14

Dividend payout= 7000/35000=.02

Hence by using the above formula

= (.99*87500)-(0.13*87500)-(0.14*337500)*(1-0.2)

= 86625-11375-37800

EFN = - $37450/-

Company's external financial need is $ 37450

Income statement	Actual	Forecasted	Delta	Balance sheet
Sales	250000	337500	87500	cash	8500			Accounts payable	26400
Expenses	192000			Accounts receivable	63000			accrued wages	2350
Interest	7500			Inventory	91000			accrued taxes	3750
EBIT	58000			fixed assets	85000			notes payable	7500
EBT	50500							Longterm debt	17500
EAT	35000							common stock	125000
Divided	7000							retained earnings	65000
					247500				247500