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Homework answers / question archive / Paladin Furnishings generated $4 million in sales during 2016, and its year-end total assets were $2

Paladin Furnishings generated $4 million in sales during 2016, and its year-end total assets were $2

Finance

Paladin Furnishings generated $4 million in sales during 2016, and its year-end total assets were $2.4 million. Also, at year-end 2016, current liabilities were $500,000, consisting of $200,000 of notes payable, $200,000 of accounts payable, and $100,000 of accrued liabilities. Looking ahead to 2017, the company estimates that its assets must increase by $0.60 for every $1.00 increase in sales. Paladin's profit margin is 4%, and its retention ratio is 60%. How large of a sales increase can the company achieve without having to raise funds externally? Write out your answer completely. For example, 25 million should be entered as 25,000,000. Do not round intermediate calculations. Round your answer to the nearest cent. ______$

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As the company does not wants to raise External Funds and thus there Growth estimate of Future sales would only be that much until which there EFN would be 0.

Formula for External funds Needed:-

EFN = (Assets/Sales)*Change in sales - (Spontaneous Liab/Sales)*Change in sales - [Forecasted Sales*Net profit Margin*Retention ratio]

Since, firm does not need External funds, EFN will be 0.

Let Change in Sales be X.

Asset in 2017 will increase by $0.60 for every $1 increase in sales. Increase in Assets in 2017 = Change in Sales*(0$0.60/$1) = (X*0.60)

Spontaneous Liab = Accounts Payable + Accured Liabilities (notes Payable are not part of Spontaneous Liab)

= $200,000 + $100,000 = $300,000

Forecasted Sales = Sales of 2016 + Change in Sales

= $4000,000+ X

Net profit Margin = 4%

Retention ratio = 60%

Calculating the Change in Sales using EFN formula:-

0 = [(2400,000/4,000,000)*(X*0.60)] - [(300,000/4,000,000)*X] - [($4000,000+ X)*4%*0.60]

0 = 0.36X - 0.075X - ($4000,000+ X)*0.024

0 = 0.285X - 96,000 - 0.024X

96,000 = 0.261X

X = $367,816.09

So, Increase in Sales will be $367,816.09 to achieve 0 external funds

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