Question

The most recent financial statements for ABC Inc., follow. Sales for next year are projected to grow by 25 percent. Interest expense will remain constant; the tax rate and the dividend payout rate will also remain constant. Costs, other expenses, current assets, fixed assets and accounts payable increase spontaneously with sales.

ABC, INC. Income Statement of Last Year
Sales				$	759,000
Costs					594,000
Other expenses					15,000
Earnings before interest and taxes				$	150,000
Interest paid					16,000
AB  Taxable income				$	134,000
Taxes (30%)					40,200
Net income				$	93,800
Dividends	$	35,140
Addition to retained earnings		58,660

ABC, INC. Balance Sheet of Last Year
Assets				Liabilities and Owners’ Equity
Current assets				Current liabilities
Cash	$	21,840		Accounts payable	$	56,000
Accounts receivable		34,160		Notes payable		15,200
Inventory		71,120		Total	$	71,200
Total	$	127,120		Long-term debt	$	142,000
Fixed assets				Owners’ equity
Net plant and equipment	$	363,000		Common stock and paid-in surplus	$	128,000
				Retained earnings		148,920
				Total	$	276,920
Total assets	$	490,120		Total liabilities and owners’ equity	$	490,120

1. The firm is operating at its full capacity, and it will have to increase its fixed assets as it increases its current assets. What is the additional funding requirement for the next year based on the first step?

2. If the entire needs are funded by a 3% bank loan, what should be the size of the loan?

USE EXCEL **

Answer 1