Question

JSN Enterprise is evaluating its financing requirements for the coming year. The firm has
only been in business for 1 year, but its CFO predicts that the firm's operating expenses,
current assets, net fixed assets, and current liabilities will remain at their current
proportion of sales. Last year JSN had $14 million in sales with net income of $1.4
million. The firm anticipates that next year's sales will reach $15 million with net income
rising to $2 million. Given its present high rate of growth, the firm retains all its earnings
to help defray the cost of new investments. The firm's balance sheet for the year just
ended is found below:

Balance Sheet
12/31/2001	% of Sales
Currentassets	$4,000,000	25%
Netfixedassets	6,000,000	50%
Total	$10,000,000
LiabilitiesandOwners'Equity
Accountspayable	$4,000,000	25%
Long-termdebt	1,000,000	NA
Totalliabilities	$5,000,000
Commonstock	2,000,000	NA
Paid-incapital	1,900,000	NA
Retainedearnings	1,100,000
Commonequity	5,000,000
Total	$10,000,000

Estimate JSN’s total financing requirements (i.e., total assets) for 2002 and its net funding
requirements (DFN).

Answer 1

The balance sheet for the year ended 31^st December, 2001 of JSN Enterprise is provided below:

Current assets	$40,00,000
Net fixed assets	$60,00,000
Total	$1,00,00,000
Liabilities & Owners' Equity
Accounts payable	$40,00,000
Long term debt	$10,00,000
Total liabilities	$50,00,000
Common stock	$20,00,000
Paid-in capital	$19,00,000
Retained earnings	$11,00,000
Common equity	$50,00,000
Total	$1,00,00,000

NA implies that the figures don’t vary directly with sales and are considered to remain constant for the purpose of forecasting financing requirements for the next year.

Given, Sales for last year = $14,000,000

Net income for last year = $14,00,000

Forecasted sales for next year = $15,000,000

Forecasted net income for next year = $2,000,000

Therefore, next year retained earnings = Last year retained earnings + Net income for the year 2002 = $11,00,000 + $2,000,000 = $31,00,000.

The forecasted balance sheet of the entity for the year of 2002 is as follows:

Balance Sheet	Percentage of sales	2002
Sales		$1,50,00,000
Net income		$20,00,000
Current assets (Sales X 25 %)	25%	$37,50,000
Net fixed assets (Sales X 50 %)	50%	$75,00,000
Total Assets		$1,12,50,000
Liabilities & Owners’ Equity
Accounts payable (Sales X 25 %)	25%	$37,50,000
Long term debt		$10,00,000
Total liabilities		$47,50,000
Common stock		$20,00,000
Paid-in capital		$19,00,000
Retained earnings ($11,00,000 + $2,000,000)		$31,00,000
Common equity		$70,00,000
Total liabilities & Equity		$1,17,50,000

DFN = Total assets – total liabilities and equity = $1,12,50,000 - $1,17,50,000 = -$500,000.