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. Assets Cash Accounts receivable Inventory Current assets Fixed assets Balance Sheet (in $ millions) Liabilities and Stockholders' Equity $ 7 Accounts payable 24 Accrued wages 27 Accrued taxes $ 58 Current liabilities 44 Notes payable Common stock Retained earnings $ 102 Total liabilities and stockholders' equity $ 20 6 14 $ 40 15 19 28 $ 102 Total assets Owen's Electronics has an aftertax profit margin of 10 percent and a dividend payout ratio of 50 percent. If sales grow by 30 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, not millions, (e.g., $1,234,567).) New funds < Prev 3 of 35 Next >

Answer 1

New Funds= $12,100,000

Working:-

Increase in sales= Last year sales*Growth rate

=$100 million*30%=$30 million

Since total assets and current liabilities vary with sales

So Assets and current liabilities will increase by 30%

• Increase in Assets=Last year Assets*30%

=$102*30%=$30.6 million

• Increase in current Liabilities= Last year current liabilities*30%

=$40*30%=$12 million

Increase in retained earning= Profit*retention ratio

=($100+$30)*10%*50%

=6.5 million

*retention ratio= (1-Dividend payout ratio)

=(1-50%)=50%

So Fund needed= Increase in assets-Increase in Current Liabilities-increase in retained earnings

=$30.6 million-$12 million-$6.5 million

=$12.1 million

=$12,100,000

"please Rate if it helps you or let me know if anything else"