Question

In: Finance

A firm has total assets of $370,000, long-term debt of $140,000, stockholders' equity of $160,000, and...

A firm has total assets of $370,000, long-term debt of $140,000, stockholders' equity of $160,000, and current liabilities of $70,000. The dividend payout ratio is 30 percent and the profit margin is 8 percent. Assume all assets and current liabilities change spontaneously with sales and the firm is currently operating at full capacity. What is the external financing need if the current sales of $500,000 are projected to increase by 15 percent?

$11,200

$11,600

$12,000

$12,400

$12,800

Solutions

Expert Solution

$12,800

Working:

External financing need = Increase in Assets -increase in liabilities-Increase in retained earning
= $       55,500 - $ 10,500 - $ 32,200
= $       12,800
Working:
Increase in assets = Current Assets * Percentage change in sales
= $     3,70,000 *15%
= $       55,500
Increase in current liabilities = Current liabilities * percentage change in sales
= $       70,000 *15%
= $       10,500
Increase in retaned earning = Increased sales*Profit Margin*Retention ratio
= 500000*115%*8%*(1-0.30)
= $       32,200

jeff jeffy answered 4 hours ago
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