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Homework answers / question archive / Suppose that Wind Em Corp
Suppose that Wind Em Corp. currently has the balance sheet shown below, and that sales for the year just ended were $6.3 million. The firm also has a profit margin of 30 percent, a retention ratio of 20 percent, and expects sales of $7.3 million next year.
Assets Liabilities and Equity
Current assets$1,559,000 Current liabilities$1,699,110
Fixed assets 4,300,000 Long-term debt 1,850,000
Equity 2,309,890
Total assets$5,859,000 Total liabilities and equity$5,859,000
If all assets and current liabilities are expected to grow with sales, what amount of additional funds will Wind Em need from external sources to fund the expected growth? (Enter your answer in dollars not in millions.)
1) Assets X Change in sales 2) Liabilities X change in sales
sales sales
3) Margin x sales x retained earnings = increase in retained earnings
Sales Sales
Sales
Necessary increase in assets= (Total assets/ Current sales)* ( Expected sales in the next year- Current sales)
= ( 5859000/ 6300000)* ( 7300000- 6300000)
= 930000
Spontaneous increase in liabilities= (Current liabilities/ Current sales)* ( Expected sales in the next year- Current sales)
= = ( 1699110/ 6300000)* ( 7300000- 6300000)
= 269700
Projected increase in retained earnings= Profit margin* Next year expected sales* Retention ratio
= 30%* 7300000* 20%
= 438000
Amount of AFN= Necessary increase in assets- Spontaneous increase in liabilities- Projected increase in retained earnings
= 930000- 269700- 438000
= 222300
