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Owen’s Electronics has nine operating plants in seven southwestern states. Sales for last year were $100...

Owen’s Electronics has nine operating plants in seven southwestern states. Sales for last year were $100 million, and the balance sheet at year-end is similar in percentage of sales to that of previous years (and this will continue in the future). All assets (including fixed assets) and current liabilities will vary directly with sales. The firm is working at full capacity.
Balance Sheet
(in $ millions)
Assets Liabilities and Stockholders' Equity
  Cash $ 4   Accounts payable $ 17
  Accounts receivable 22   Accrued wages 4
  Inventory 25   Accrued taxes 10
   Current assets $ 51     Current liabilities $ 31
  Fixed assets 42   Notes payable 12
  Common stock 17
  Retained earnings 33
  Total assets $ 93   Total liabilities and
   stockholders' equity		 $ 93

   Owen’s has an aftertax profit margin of 7 percent and a dividend payout ratio of 25 percent.

If sales grow by 20 percent next year, determine how many dollars of new funds are needed to finance the growth. (Do not round intermediate calculations. Enter your answer in dollars, not millions, (e.g., $1,234,567).)

New FUNDS would be _________???

Solutions

Expert Solution

New FUNDS would be $             61,00,000
Working:
a. Increased Sales = $       10,00,00,000 x 1.20 = $       12,00,00,000
After tax profit margin = $       12,00,00,000 x 7% = $             84,00,000
Retained Income = $             84,00,000 x (1-0.25) = $             63,00,000
b. Increase in Assets = $          9,30,00,000 x 20% = $          1,86,00,000
c. Increase in current liabilities = $          3,10,00,000 x 20% = $             62,00,000
d. External Finance needed = Increase in Assets - Increase in current liabilities -Retained Income
= $          1,86,00,000 - $   62,00,000 - $             63,00,000
= $             61,00,000
Thus,
Dollars of new funds are needed to finance the growth $           61,00,000

jeff jeffy answered 2 years ago
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