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?

Answer 1

Sales Growth % = Increase in sales / Current sales = $2 million / $6 million = 33.33%
Expected current assets = $1800000 * (1+0.3333) = $24,00,000
Expected Current liabilities = $1620000 * (1+0.3333) = $21,60,000
Expected Fixed assets = $3960000 + $1000000 = $49,60,000
Increase in retained earnings = Expected sales * Profit Margin * retention ratio
Increase in retained earnings = $80,00,000 * 30% * 20% = $4,80,000
Expected Equity = $21,40,000 + $4,80,000 = $26,20,000
Calculation of additional funds needed to fund the expected growth
Expected Current assets	$2,400,000.00
Expected Fixed assets	$4,960,000.00
Total Expected Assets	$7,360,000.00
Less : Expected current liabilities	$2,160,000.00
Less : Current long term debt	$2,000,000.00
Less : Expected Equity	$2,620,000.00
Additional Funds Needed	$580,000.00