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Great Subs believes it can increase sales by 50% without any increase in net fixed assets
Great Subs believes it can increase sales by 50% without any increase in net fixed assets. Earnings after tax are expected to be $2,000.The company pays no dividends. What additional financing will Subs need to finance this growth? Subs' balance sheet currently is as follows:
| Cash | $2,500 | Accounts playable | $5,600 |
| Accounts Rec. | 4,400 | Notes payable | 10,000 |
| Inventory | 6,000 | Long term debt | 15,000 |
| Fixed assets, net | 47,700 | Stockholder's equity | 30,000 |
| $60,600 | $60,600 |
A)$3,350 surplus, no additional financing needed
B) $1,650
C) $3,650
D) None of the answers is correct.
Expert Solution
The answer is D) None of the answers is correct. In the coming year, the company will need to settle its net working capital deficit of $2,700 ($2,500 + $4,400 + $6,000 - $5,600 - $10,000 = $2,700). It will be able to partially do so with the $2,000 of after-tax income expected in coming year. However, a shortfall of $700 remains.
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