Question

Question 4 (Mandatory) (1.5 points) Suppose that BBM Industries, Inc. currently has the balance sheet shown as follows. and that sales for the year just ended were $2 million. The firm also has a profit margin of 5 percent, a retention ratio of 50 percent, and expects sales of $2.5 million next year. If all assets and current liabilities are expected to increase with sales, what amount of additional funds will the company need from external sources to fund the expected growth? Assets Liabilities and Equity Current Assets Current Liabilities S 100 Fixed Assets $ 2.000.000 Long-term Debt 51.000.000 Equity 5.1.000.000 Total Assets $3,000,000 Total Liab $437,500 $0 $62,500 O $500,000

Answer 1

EFN = ((current level of assets - current level of short-term liabilities) * % increase in sales) - (next year sales * net profit margin * retention ratio)

% increase in sales = (next year sales - current year sales) / current year sales

% increase in sales = ($25,000,000 - $20,000,000) / $20,000,000 = 25%

net profit margin = 5%

retention ratio = 50%

current level of assets = $3,000,000

current level of short-term liabilities = $1,000,000

EFN = (($3,000,000 - $1,000,000) * 25%) - ($25,000,000 * 5% * 50%)

EFN = -$125,000

As the EFN is negative, no additional funds are required from external sources. The internal funds are sufficient to fund growth.

The answer is $0