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 Sales Expenses Earnings before interest and taxes Interest Earnings before taxes $ 270,000 217,400 $ 52,600 8,800 $ 43,800 16,800 $ 27,000 $ 10,800 Taxes Earnings after taxes Dividends Assets Cash Accounts receivable Inventory Current assets Fixed assets Balance Sheet Liabilities and Stockholders' Equity $ 6,000 Accounts payable 54,500 Accrued wages 61,000 Accrued taxes $ 121,500 Current liabilities 98,000 Notes payable Long-term debt Common stock Retained earnings $ 219,500 Total liabilities and stockholders' equity $ 28,400 2,100 4,600 $ 35, 100 8,800 24,000 122,000 29,600 $ 219,500 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 firmſ

Answer 1

Profit margin = Earnings after taxes / Sales = $27,000 / $270,000 = 0.10, or 10%

Payout ratio = Dividends / Earnings = $10,800 / $27,000= 0.40, or 40%

Spontaneous Assets = Current assets

Spontaneous Liabilities = Current liabilities

Additional Funds Needed = [A0 x (ΔS / S0)] - [L0 x (ΔS / S0)] - [S1 x PM x b]

Where,
A_o = current level of assets
L_o = current level of liabilities
ΔS/S_o = percentage increase in sales i.e. change in sales divided by current sales
S₁ = new level of sales
PM = profit margin
b = retention rate = 1 - payout rate

AFN = [$121,500 x 0.30] - [$35,100 x 0.30] - [($270,000 * 1.30) x 0.10 x (1 - 0.40)]

= $36,450 - $10,530 - $21,060 = $4,860

The firm needs $4,860 in external funds.