Question

In: Finance

Suppose that Wall-E Corp. currently has the balance sheet shown below, and that sales for the...

Suppose that Wall-E Corp. currently has the balance sheet shown below, and that sales for the year just ended were $6.3 million. The firm also has a profit margin of 30 percent, a retention ratio of 20 percent, and expects sales of $8.3 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 $ 1,701,000 Current liabilities $ 1,890,000 Fixed assets 4,347,000 Long-term debt 1,850,000 Equity 2,308,000 Total assets $ 6,048,000 Total liabilities and equity $ 6,048,000 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?

Solutions

Expert Solution

Calculation of external finance needed(Assets are fully utilized)

The financing requirement is calculated based on percentage sales method.

(A).Required increase in assets=(Current total asset)* (percentage increase in sales)=A0*((S1-S0)/S0)

A0=Fixed assets in current period=$4,347,000

S0=Sales in current period

S1= Sales in next period

Current sales=$6.3 million

Increase in sales=S1-S0=($8.3 million-$6.3 million)/$6.3 million=2/6.3=0.31746

Required increase in fixed assets=$4,347,000*0.31746= $ 1,380,000

Fixed assets can be added in increment of $ 1 million

Hence increase in fixed assets required=$ 2million

(B).Spontaneous increase in Current assets=(Current assets)* 0.31746=1701000*0.31746=

$   540,000

Spontaneous increase in Current liabilities=(Current Liabilities)*0.31746=

1890000*0.31746= $ 600,000

Net decrease in working capital=(600000-540000)=-$60,000

(C)Increase in retained earning =(Profit margin)*(Sales)*(Retention ratio)

Retention Ratio=0.2

Profit margin=0.3

Increase in retained earning=0.3*8300000*0.2= $ 498,000

External Finance Required=(A)-(B)-(C)=$2,000,000-$60,000-$498,000= $ 1,442,000

External Finance Required

$        1,442,000


Related Solutions

Suppose that Wall-E Corp. currently has the balance sheet shown below and that sales for the...
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...
Suppose that Wall-E Corp. currently has the balance sheet shown below, and that sales for the...
Suppose that Wall-E Corp. currently has the balance sheet shown below, and that sales for the year just ended were $7.5 million. The firm also has a profit margin of 30 percent, a retention ratio of 20 percent, and expects sales of $9.5 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 $ 2,400,000 Current liabilities...
Suppose that Wall-E Corp. currently has the balance sheet shown below, and that sales for the...
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...
Suppose that Wind Em Corp. currently has the balance sheet shown below, and that sales for...
Suppose that Wind Em Corp. currently has the balance sheet shown below, and that sales for the year just ended were $6.2 million. The firm also has a profit margin of 25 percent, a retention ratio of 30 percent, and expects sales of $7.2 million next year. Assets Liabilities and Equity Current assets $ 1,504,000 Current liabilities $ 1,597,120 Fixed assets 4,200,000 Long-term debt 1,900,000 Equity 2,206,880 Total assets $ 5,704,000 Total liabilities and equity $ 5,704,000 If all assets...
Suppose that Gyp Sum Industries currently has the balance sheet shown below, and that sales for...
Suppose that Gyp Sum Industries currently has the balance sheet shown below, and that sales for the year just ended were $9.1 million. The firm also has a profit margin of 20 percent, a retention ratio of 25 percent, and expects sales of $7.1 million next year. Assets Liabilities and Equity Current assets $ 469,000 Current liabilities $ 859,040 Fixed assets 4,900,000 Long-term debt 1,950,000 Equity 2,559,960 Total assets $ 5,369,000 Total liabilities and equity $ 5,369,000 If all assets...
Suppose that Gyp Sum Industries currently has the balance sheet shown below, and that sales for...
Suppose that Gyp Sum Industries currently has the balance sheet shown below, and that sales for the year just ended were $10.9 million. The firm also has a profit margin of 25 percent, a retention ratio of 30 percent, and expects sales of $8.9 million next year. Assets Liabilities and Equity Current assets $ 2,621,000 Current liabilities $ 2,557,140 Fixed assets 4,900,000 Long-term debt 1,950,000 Equity 3,013,860 Total assets $ 7,521,000 Total liabilities and equity $ 7,521,000 If all assets...
the balance sheet for the serden company is shown below for sales of $300000. using the...
the balance sheet for the serden company is shown below for sales of $300000. using the percentage of sales method, assuming no long-term debt is paid off how much outside financing is required?(assume net profit to sales is 6 percent, payout ratio is 60 percent of net income, and sales increase 40 percent during 2019). serden company balance sheet as of Dec. 31, 2018 cash    $15,000 accounts receivable    $60,000 inventory $90,000 current assets $165,000 fixed assets $30,000 total...
Suppose that Big Bucks Bank has the simplified balance sheet shown below. The reserve ratio is...
Suppose that Big Bucks Bank has the simplified balance sheet shown below. The reserve ratio is 10 percent. Instructions: Enter your answers as whole numbers. a. What is the maximum amount of new loans that Big Bucks Bank can make?      $  .     Show in columns 1 and 1' how the bank's balance sheet will appear after the bank has lent this additional amount. Assets Liabilities and net worth (1) (2) (1' ) (2' ) Reserves $23,000    $ $ Checkable...
Berman & Jaccor Corporation's current sales and partial balance sheet are shown below. This year Sales...
Berman & Jaccor Corporation's current sales and partial balance sheet are shown below. This year Sales $ 1,000 Balance Sheet: Assets Cash $ 200 Short-term investments $ 140 Accounts receivable $ 100 Inventories $ 150     Total current assets $ 590 Net fixed assets $ 400     Total assets $ 990 Sales are expected to grow by 12% next year. Assuming no change in operations from this year to next year, what are the projected total operating assets? Do not round intermediate...
The balance sheet for the LR Corp is presented below. The only asset on balance sheet...
The balance sheet for the LR Corp is presented below. The only asset on balance sheet is in excess of fair market value is inventory, which has a FMV of $60,000. LR is planning to undertake a quasi-reorganization. A. Explain why a company in LR's position may want to undertake a quasi-reorganization? B. What steps are involved in a quasi-reorganization? C. Present the necessary journal entries? Cash 30,000 Receivables 55,000 Inventory 70,000 PP&E (net) 175,000 Total Assets 330,000 Liabilities 150,000...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT