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M and H Corporation is evaluating its financing requirements for the coming year

Finance

M and H Corporation is evaluating its financing requirements for the coming year. The firm has only been in business for 1 year, but its CFO predicts that the firm's operating expenses, current assets, net fixed assets, and current liabilities will remain at their current proportion of sales. Last year M and H Corp. had $15 million in sales with net income of $1.5 million. The firm anticipates that next year's sales will reach $18 million with net income rising to $3 million. Given its present high rate of growth, the firm retains all its earnings to help defray the cost of new investments.

The firm's balance sheet for the year just ended is found below:

 

M and H Corporation Balance Sheet 12/31/2000
    % of Sales
Current assets $6,000,000 40 %
Net fixed assets 9,000,000 60 %
Total $15,000,000  
Liabilities and Owner's Equity    
Accounts payable $3,750,000 25 %
Long-term debt 4,250,000 NA
Total liabilites $8,000,000  
Common stock 2,000,000 NA
Paid-in capital 2,800,000 NA
Retained Earnings 2,200,000  
Common Equity 7,000,000  
Total $15,000,000  

 

Estimate M and H Corp., total financing requirement (i.e., total assets) for 2001 and its net funding requirements (DFN).

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Particulars Year 1   Year 2
Assets      
Current Assets 6,000,000 +0.40 of sales 7,200,000
Net Fixed Assets 9,000,000 +0.60 of sales 10,800,000
Total assets 15,000,000   18,000,000
Liabilities and Owners equity      
Accounts payable 3,750,000 +0.25 of sales 4,500,000
Long term debts 4,250,000   4,250,000
Total debts 8,000,000   8,750,000
Common stock 2,000,000   2,000,000
Paid in capital 2,800,000   2,800,000
Retained earnings 2,200,000 Increase in Net income which is all retained 5,200,000
  15,000,000   18,750,000
DFN     -750,000

The firm will have surplus funds to the extent of $750,000. Hence, no funding is required.