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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 $ 11 Accounts payable $ 23
Accounts receivable 28 Accrued wages 10
Inventory 29 Accrued taxes 13
Current assets $ 68 Current liabilities $ 46
Fixed assets 46 Notes payable 18
Common stock 20
Retained earnings 30
Total assets $ 114 Total liabilities and stockholders' equity $ 114

Owen’s has an aftertax profit margin of 10 percent and a dividend payout ratio of 50 percent.

If sales grow by 30 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:

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Expert Solution

Sales is expected to grow 30% next year which implies that all balance sheet items that grow proportionally with sales will also increase by the same %. Therefore, fixed assets, current assets and current liabilities will also grow by 30% each.

Current Sales = $ 100 million, After-Tax Profit Margin (Net Income Margin) = 10 %

Net Income = 0.1 x 100 = $ 10 million

Expected Sales = 1.3 x 100 = $ 130 million and if the Net profit margin remains intact at 10 % of sales, then expected net income = 0.1 x 130 = $ 13 million

Dividend Payout Ratio = 50% , Dividends = 0.5 x 13 = $ 6.5 million and Retained Earnings = Net Income - Dividends = 13 - 6.5 = $ 6.5 million

Expected Total Assets = 1.3 x 114 = $ 148.2 million

Expected Current Liabilities = 1.3 x 46 = $ 59.8 million

Expected Retained Earnings = $ 6.5 million

Therefore, next year Total Assets = Current Liabilities + Notes Payable + Common Stock + Retained Earnings + Increase in Retained Earnings (Expected Retained Earnings) + New Funds (External Financing Needed)

148.2 = 59.8 + 18 + 20 + 30 + 6.5 + New Funds

New Funds = 148.2 - 59.8 - 18 - 20 - 30 - 6.5 = $ 13.9 million

jeff jeffy answered 1 year ago
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