Question

After adding a new line of widgets, Worldwide expects all assets and current liabilities to shrink with sales. the company has sales for the year just ended of $20 million. The company also has a profit margin of 20 percent, a return ratio of 25 percent, and expected sales of $18 million next year.

Worldwide Widgets Manufacturing, Inc., shows the following on its balance sheet:

Assets		Liabilities & Equity
Current Assets	$2,500,000	Current liabilites	$1,250,000
Fixed Assets	$3,500,000	Long-term Debt	$1,500,000
		Equity	$3,250,000
Total Assets	$6,000,000	Total Liabilities & Equity	$6,000,000

What amount of additional funds (AFN) will worldwide need from external sources to fund the expected growth? What does the AFN show?

Please show all detailed calculations.

Also kindly put the answers not on pen and paper but typed instead. Thanks

Answer 1

Answer:

Additional funds needed =  

Current level of assets = $ 6 million

Percentage increase in sales (i.e Change in sales divide by current sales)

  

Current level of liabilities (current liabilities is to shrink with sales)

  million

new level of sales

  millon

Profit margin = 20%

retention ratio = 1-payout ratio

= 25%

Additional funds needed(AFN) = 6 * (-0.1) - 1.25 * (-0.1) * 18 * 20% * 25%

= - $0.4875million

The AFN shows that external funding is not required which is in line since sales are decreasing from 20million to 18million after introducing the new line.

Incase the question had been that the sales increases by 18million after introduction of this line then the AFN would be

= 20+18 = $38 million   

AFN = 6 * 0.9 - 1.25 * 0.9 * 38 * 20% * 25%

= $ 3.2625 millions