Question

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	$	11	Accounts payable	$	24
Accounts receivable		29	Accrued wages		11
Inventory		32	Accrued taxes		17
Current assets	$	72	Current liabilities	$	52
Fixed assets		49	Notes payable		19
			Common stock		24
			Retained earnings		26
Total assets	$	121	Total liabilities and stockholders' equity	$	121

Owen’s has an aftertax profit margin of 9 percent and a dividend payout ratio of 30 percent.

If sales grow by 25 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).)

Answer 1

Solution:
	The new funds are needed to finance the growth = $9,375,000
Working Notes:
	The new funds are needed to finance the growth = [A x (ΔS/S)] - [L x (ΔS/S)] - [S1 x PM x b]
	A= current level of assets = 121,000,000
	ΔS/S = Change is sales / current sales
	=(25% x 100,000,000)/100,000,000
	=25% = 0.25
	L = Current level of assets= $52,000,000
	S1 = New sales = Current sales x 125%
	=125% x 100,000,000
	=$125,000,000
	PM = profit margin = 9%=0.09
	b= retention ratio = (1-dividend payout ratio)
	=(1-0.30) =0.70
	The new funds are needed to finance the growth = [A x (ΔS/S)] - [L x (ΔS/S)] - [S1 x PM x b]
	=[A x (ΔS/S)] - [L x (ΔS/S)] - [S1 x PM x b]
	=(121,000,000 x 0.25) - (52,000,000 x 0.25 ) -(125,000,000 x 0.09 x 0.70)
	=$9,375,000
Please feel free to ask if anything about above solution in comment section of the question.