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Lambert Transport is an overland freight service that is operating at full capacity They have sales...

Lambert Transport is an overland freight service that is operating at full capacity They have sales of $29,000, current assets of $1,600, current liabilities of $1,200, net fixed assets of $27,500, and a 12.8 percent profit margin. 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 11.9 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?

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Expert Solution

Solution:
Additional equity financing is required is -$833.63
Working Notes:
Additional equity financing is required
'=Increase in assets - increase in current liabilities - profit x (1- payout ratio)
Increase in assets = (Current assets + Fixed assets) x increase %
Increase in assets = (1600 + 27500) x 11.9%
Increase in assets =$3,462.90
Increase in current liabilities
=Current liabilities x increase %
=1200 x 11.9%
=$142.80
Profit = Sales x (1+ increase%) x Profit margin
Profit = 29,000 x (1+ 11.9%) x 12.8%
Profit = $4,153.728
Additional equity financing is required
'=Increase in assets - increase in current liabilities - profit x (1- payout ratio)
'=$3,462.90 - $142.80 - $4,153.728 x (1- 0%)
'=$3,462.90 - $142.80 - $4,153.728
'=-833.628
'=   -$833.63
Please feel free to ask if anything about above solution in comment section of the question.

jeff jeffy answered 1 year ago
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