Question

The following is the balance sheet for 20X5 for Marbell Inc. Marbell Inc. Balance Sheet as at December 31, 20X5

Marbell Inc. Balance Sheet as at December 31, 20X5
Assets		Liabilities
Cash	$15,500	Accounts Payable	$ 90,000
Accts. Rec	90,000	Notes Payable (non-spontaneous)	30,000
Inventory	60,000	Accrued Expenses	7,500
Current Assets	165,000	Current Liabilities	127,500
Fixed assets (non-spontaneous)	60,000	Common stock	75,500
		Retained earnings	22,500
Total Assets	$225,000	Total Liabilities + S.H Equity	$225,000

Sales for 20X5 were $300,000. Sales for 20X6 have been projected to increase by 10%. Assuming that Marbell Inc. is operating below capacity, calculate the amount of required new funds (RNF) to finance this growth. Marbell has an 8% return on sales and 80% is paid out as dividends.

RNF = [(A/S₁) (DS)] - [(L/S) (DS)] - PS₂(1-D)

Answer 1

Answer: RNF= $1520

Workings:

Calculation REQUIRED NEW FUND:

A sales for 20X5 is 300000,

Sale is increased by 10% in 20X6= 300000+30000(300000*10/100)= 330000

Due to increase in sales spontaneous assets, spontaneous liabilities and retained earnings are affected. Since, firm is operation below capacity, therefore, non spontaneous assets shall not be considered.

RNF= (A*◇S/S1)- (L*◇S/S1)- PS2(1-D)

A = spontaneous assets = 165500=(15500+90000+60000)

L= spontaneous liabilities = 90000+7500= 97500

◇S= change in sales(330000-300000)=30000

S1= sales for 20X5

S2= sales for 20X6

P= rate of return=8%

D= dividend pay out ratio= 80%

(1-D)= retention ratio= 20%

Now, replacing the formula by its values:

=(165500/300000)*30000 - (97500/300000)*30000 - 330000*8%*(1-80%)

= 16550 - 9750 - 5280

RNF = $1520

Checking our answer:

Total assets (including increase by 16550) = 15500+90000+60000+60000+16550= 242050

Liabilities +equity(including increased liab , retained earnings and RNF)= 90000+7500+30000+9750+75500+22500+1520+5280 =242050

=>TOTAL ASSETS =LIABILITIES +EQUITY.

Please take a note -- totalling of currents assets and overall balance sheet totalling in the given question is wrong, Current assets total should be 165500 and total of balance sheet should be 225500. Please give a notice to it. Ultimately this won't affect our solution. Thank you.