Question

Paladin Furnishings generated $2 million in sales during 2019, and its year-end total assets were $1.2 million. Also, at year-end 2019, current liabilities were $500,000, consisting of $200,000 of notes payable, $200,000 of accounts payable, and $100,000 of accrued liabilities. Looking ahead to 2020, the company estimates that its assets must increase by $0.60 for every $1.00 increase in sales. Paladin's profit margin is 3%, and its retention ratio is 40%. How large of a sales increase can the company achieve without having to raise funds externally? Write out your answer completely. For example, 25 million should be entered as 25,000,000. Do not round intermediate calculations. Round your answer to the nearest cent.

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Answer 1

Formula for External funds Needed:-

EFN = (Last years Assets/Last years Sales)*Change in sales - (Last years Spontaneous Liab/Last years Sales)*Change in sales - [Net Income*retention ratio]

Since, firm does not need External funds, EFN will be 0.

Let Change in Sales be X.

Asset will increase by $0.60 for every $1 increase in sales

Spontaneous Liab = Accounts Payable + Accured Liabilities (notes Payable are not part of Spontaneous Liab)

= $200,000 + $100,000 = $300,000

Forecasted Sales = Sales of 2019 + Change in Sales

= $2000,000+ X

0 = [(1,200,000/2,000,000)*X*$0.60/$1] - [(300,000/2,000,000)*X] - [($2000,000+ X)*3%*0.40]

0 = 0.36X - 0.15X - ($2000,000+ X)*0.012

0 = 0.36X - 0.15X - 24,000 - 0.012X

24,000 = 0.198X

X = $121,212.12

So, Increase in Sales will be $21,212.12 to achieve 0 external funds