Question

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 and current liabilities are expected to shrink with sales, what amount of additional funds will Gyp Sum need from external sources to fund the expected growth? (Enter your answer in dollars not in millions. Negative amount should be indicated by a minus sign.)  

Answer 1

Answer:

Additional Fund Needed = Projected Increase in Assets – Spontaneous Increase in Liabilities – Increase in Retained Earnings

Change in Sales = $7,100,000 - $9,100,000
Change in Sales = -$2,000,000

Expected Increase in Assets = Total Assets / Current Sales * Change in Sales
Expected Increase in Assets = 5,369,000 / 9,100,000 * -2,000,000
Expected Increase in Assets = -$1,180,000

Spontaneous Increase in Liabilities = Current Liabilities / Current Sales * Change in Sales
Spontaneous Increase in Liabilities = 859,040 / 9,100,000 * -2,000,000
Spontaneous Increase in Liabilities = -$188,800

Projected Increase in Retained Earning = Expected Sales * Profit Margin * Retention ratio
Projected Increase in Retained Earning = $7,100,000 * 0.20 * 0.25
Projected Increase in Retained Earning = $355,000

Additional Fund Needed = -$1,180,000 – (-$188,800) - $355,000
Additional Fund Needed = -$1,346,200