Question

Suppose that Gyp Sum Industries currently has the balance sheet shown below, and that sales for the year just ended were $9.5 million. The firm also has a profit margin of 25 percent, a retention ratio of 30 percent, and expects sales of $7.5 million next year Liabilities and Equity Assets Current assets Fixed assets $ 725,000 Current 1iabilities $1,045,000 4,500,000 Long-term debt 1,750,000 2,430,000 Total liabilities $5,225,000 Equity Total assets $5,225,0o0 and equity If all assets and current liabilities are expected to shrink with sales, what amount of additional funds will Gyp Sum need from external sources to fund the expected growth? (Enter your answer in dollars not in millions. Negative amount should be indicated by a minus sign.) Additional funds needed

Answer 1

Last Year:

Sales = $9,500,000
Profit Margin = 25%
Retention Ratio = 30%
Total Assets = $5,225,000
Last Liabilities = $1,045,000

Next Year:

Sales = $7,500,000

Growth Rate = (Sales, Next Year / Sales, Last Year) - 1
Growth Rate = ($7,500,000 / $9,500,000) - 1
Growth Rate = 0.7895 - 1
Growth Rate = -0.2105 or -21.05%

Net Income = Sales * Profit Margin
Net Income = $7,500,000 * 25%
Net Income = $1,875,000

Addition to Retained Earnings = Net Income * Retention Ratio
Addition to Retained Earnings = $1,875,000 * 30%
Addition to Retained Earnings = $562,500

Increase in Assets = Assets, Last Year * Growth Rate
Increase in Assets = $5,225,000 * (-0.2105)
Increase in Assets = -$1,099,862.50

Increase in Last Liabilities = Last Liabilities, Last Year * Growth Rate
Increase in Last Liabilities = $1,045,000 * (-0.2105)
Increase in Last Liabilities = -$219,972.50

Additional Funds Needed = Increase in Assets - Addition to Retained Earnings - Increase in Last Liabilities
Additional Funds Needed = -$1,099,862.50 - $562,500 - (-$219,972.50)
Additional Funds Needed = -$1,442,390