Question

Suppose that Wall-E Corp. currently has the balance sheet shown below and that sales for the year just ended were $6.0 million. The firm also has a profit margin of 30 percent, a retention ratio of 20 percent, and expects sales of $8.0 million next year. Fixed assets are currently fully utilized, and the nature of Wall-E’s fixed assets is such that they must be added in $1 million increments. Assets Liabilities and Equity Current assets $ 1,800,000 Current liabilities $ 1,620,000 Fixed assets 3,960,000 Long-term debt 2,000,000 Equity 2,140,000 Total assets $ 5,760,000 Total liabilities and equity $ 5,760,000 If current assets and current liabilities are expected to grow with sales, what amount of additional funds will Wall-E need from external sources to fund the expected growth? (Enter your answer in dollars not in millions.)

Additional funds needed $

Answer 1

1. Increase in Current Assets = Change in Sales * Current Assets / Sales in Previous Year

Increase in Current Assets = $2000000 * $1800000 / $6000000

Increase in Current Assets = $2000000 * $1800000 / $6000000

Increase in Current Assets = $600000

2. Increase in Fixed Assets = Change in Sales * Fixed Assets / Sales in Previous Year

Increase in Fixed Assets = $2000000 * $3960000 / $6000000

Increase in Fixed Assets = $1320000

As the Incrments in Fixed assets should be in $1 Million, THe Fixed assets will increase by $2000000

3. Increase in Current Liabilities = Change in Sales * Curretn Liabilities / Sales in Previous Year

Increase in Current Liabilities = $2000000 * $1620000 / $6000000

Increase in Current Liabilities = $540000

4. Increase in Retained Earnings = Profit Margin * New Sales * Retention Ratio

Increase in Retained Earnings = 30% * $8000000 * 20%

Increase in Retained Earnings = $480000

Thus AFN = Increase in Assets - Inrease in Liabilities - Increase in Retained Earnings

AFN = $600000 + $2000000 - $540000 - $480000

AFN = $1580000