Question

Owen’s Electronics has nine operating plants in seven southwestern states. Sales for last year were $100 million, and the balance sheet at year-end is similar in percentage of sales to that of previous years (and this will continue in the future). All assets (including fixed assets) and current liabilities will vary directly with sales. The firm is working at full capacity. Balance Sheet (in $ millions) Assets Liabilities and Stockholders' Equity Cash $ 10                              Accounts payable $ 23                        Accounts receivable 28                        Accrued wages 10

Inventory 31                     Accrued taxes 16                              Current assets $ 69                                Current liabilities $ 49

Fixed assets 48                Notes payable 18                            Common stock 23                              Retained earnings 27

Total assets $ 117                        Total liabilities and stockholders' equity $ 117

Owen’s Electronics has an aftertax profit margin of 8 percent and a dividend payout ratio of 30 percent.

If sales grow by 20 percent next year, determine how many dollars of new funds are needed to finance the growth. (Do not round intermediate calculations. Enter your answer in dollars.

Answer 1

Solution: Increase in assets 117*0.2 Less : Increase in current liabilities | 49*0.2 Total fund needed Less : addition to RE 100*1.2*0.08*(1-0.3) External funds needed 23.40 - 9.80 13.60 - 6.72 6.88