Question

Suppose that Gyp Sum Industries currently has the balance sheet shown below, and that sales for the year just ended were $10.9 million. The firm also has a profit margin of 25 percent, a retention ratio of 30 percent, and expects sales of $8.9 million next year. Assets Liabilities and Equity Current assets $ 2,621,000 Current liabilities $ 2,557,140 Fixed assets 4,900,000 Long-term debt 1,950,000 Equity 3,013,860 Total assets $ 7,521,000 Total liabilities and equity $ 7,521,000 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?

Answer 1

Amount of additional funds need from external sources to fund the expected growth is -$1,578,368.31

Calculations: -

Last Year Sales = $10,900,000
Profit Margin = 25%
Retention Ratio = 30%
Total Assets = $7,521,000
current Liabilities = $ 2,557,140

Next Year Sales = $8,900,000

Growth Rate = (Sales, Next Year / Sales, Last Year) - 1
Growth Rate = ($8,900,000 / $10,900,000) - 1
Growth Rate = 0.8165 - 1
Growth Rate = -0.1835 or -18.35%

Net Income = Sales * Profit Margin
Net Income = $8,900,000 * 25%
Net Income = $2,225,000

Addition to Retained Earnings = Net Income * Retention Ratio
Addition to Retained Earnings = $2,225,000* 30%
Addition to Retained Earnings = $667,500

Increase in Assets = Assets, Last Year * Growth Rate
Increase in Assets = $7,521,000 * (-0.1835)
Increase in Assets = -$1,380,103.50

Increase in current Liabilities = Last Liabilities, Last Year * Growth Rate
Increase in current Liabilities = $2,557,140* (-0.1835)
Increase in current Liabilities = -$469,235.19

Additional Funds Needed = Increase in Assets - Addition to Retained Earnings - Increase in current Liabilities
Additional Funds Needed = -$1,380,103.50- $667,500- (-$469,235.19)
Additional Funds Needed = -$1,578,368.31