Question

The Manning Company has financial statements as shown next, which are representative of the company's historical average. The firm is expecting a 30 percent increase in sales next year, and management is concerned about the company's need for external funds. The increase in sales is expected to be carried out without any expansion of fixed assets, but rather through more efficient asset utilization in the existing store. Among liabilities, only current liabilities vary directly with sales. Income Statement $270,000 217,400 52,600 8,800 $ 43,800 16,800 $ 27,000 10,800 Sales Expenses Earnings before interest and taxes Interest Earnings before taxes Таxes Earnings after taxes Dividends Balance Sheet Assets Liabilities and Stockholders' Equity Cash $ 28,400 2,100 4,600 $ 35,100 8,800 24,000 122,000 29,600 $ 219,500 6,000 Accounts payable 54,500 Accrued wages 61,000 Accrued taxes Accounts receivable Inventory $ 121,500 Current assets Current liabilities 98,000 Notes payable Long-term debt Common stock Retained earnings Fixed assets 219,500 Total liabilities and stockholders' equity Total assets Using the percent-of-sales method, determine whether the company has external financing needs, or a surplus of funds. (Hint: A profit margin and payout ratio must be found from the income statement.) (Do not round intermediate calculations.) The firm

Answer 1

First we need to calculate the additional sales expected next year:

New Sales = 270000*(1+0.3) = $ 351,000

Increase in Sales = 351000 - 270000 = $ 81,000

This increase in sales will need to be funded by current assets & expected profits. Liabilities are also likely to rise also the demands on dividend will also come into play with increased sales.

Thus first we calculate the Profit Margin = Earnings After Tax / Sales = 27000 / 270000 = 10%

Next we calculate the dividend payout ratio = Dividend / Earnings After Tax = 10800/27000 = 40%. This indicates that 40% of the money the company earns is paid out to shareholders as dividend

New Funds needed = Current Assets * (Increase in Sales)/ Old Sales - Current Liabilities*(Increase in Sales / Old Sales) - Profit Margin * New Sales(1-Dividend Payout Ratio) = 121500*81000/270000 - 35100*81000/270000 - 0.1*351000(1-0.4)

New Funds Needed = $4,860