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Berkshire Building Services generated $98 million in sales during the current year, and its year-end total...

Berkshire Building Services generated $98 million in sales during the current year, and its year-end total assets were $118 million. Also, at year-end, current liabilities were $5,895,000 consisting of $3,144,000 of accounts payable, $1,572,000 of accruals, and $1,179,000 of notes payable. The firm’s profit margin was 7% and payout ratio was 38%. The firm considered itself at full capacity in the current year. Looking ahead to next year, estimate the additional funds needed if the firm intends to grow sales by 8%.

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Expert Solution

Current Year:

Sales = $98,000,000
Total Assets = $118,000,000
Profit Margin = 7.00%

Retention Ratio = 1 - Payout Ratio
Retention Ratio = 1 - 0.38
Retention Ratio = 0.62

Spontaneous Current Liabilities = Accounts Payable + Accruals
Spontaneous Current Liabilities = $3,144,000 + $1,572,000
Spontaneous Current Liabilities = $4,716,000

Next Year:

Sales = $98,000,000 + 8% * $98,000,000
Sales = $105,840,000

Addition to Retained Earnings = Sales * Profit Margin * Retention Ratio
Addition to Retained Earnings = $105,840,000 * 7.00% * 0.62
Addition to Retained Earnings = $4,593,456

Increase in Total Assets = $118,000,000 * 0.08
Increase in Total Assets = $9,440,000

Increase in Spontaneous Current Liabilities = $4,716,000 * 0.08
Increase in Spontaneous Current Liabilities = $377,280

Additional Fund Needed = Increase in Total Assets - Increase in Spontaneous Current Liabilities - Addition to Retained Earnings
Additional Fund Needed = $9,440,000 - $377,280 - $4,593,456
Additional Fund Needed = $4,469,264

jeff jeffy answered 6 months ago
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