Firm X has the following balance sheet: ? Balance Sheet as of 12/31/XX Assets Liabilities and Equity Cash $ 3,500 Accounts payable $14,500 Marketable securities 3,000 Bank loans 35,000 Accounts receivable 27,000 Bonds 21,500 Inventory 31,000 Common stock 10,000 Plant & equipment 77,000 Retained earnings 60,500 $141,500 $141,500 ? Sales are

Question

currently $100,000 and management expects them to rise by 20 percent to $120,000. The profit margin on sales is 10 percent and the firm distributes 30 percent of its earnings as cash dividends. ? a. How much external finance will be required by the expansion according to the percent of sales technique? ? b. If the firm needs external finance, the funds should be acquired by issuing long-term debt. If the firm has excess funds, they should be held in marketable securities. If the firm needs funds, management may also draw upon the firm's holdings of marketable securities. Construct a new projected balance sheet for the anticipated level of sales assuming that management does not increase the firm's holdings of cash.?

What will be an ideal response?

Answer 1

a.External Funding  =     Assets(Change in Sales) minus  Requirements               Sales?  Liabilities(Change in Sales) minus Retained Earnings     Sales?=       $58 x $20.0 ?  $14.5 x $20.0 ?  $120(.1)(.7) = $3     $141.5               $141.5?The firm needs only $3 (i.e., $300 since the above calculation is in hundreds).?b.?The new balance sheet as of 12/31/XX?       Assets                                  Liabilities and Equity    Cash                          $  3,500  Accounts payable    $ 17,400  Marketable securities     2,700  Bank loans                 35,000  Accounts receivable     32,400  Bonds                        21,500  Inventory                     37,200  Common stock            10,000  Plant & equipment       80,000   Retained earnings       68,900                                 $153,100                                 $153,100                ?The modest need for funds was met by the reduction in the marketable securities. Presumably, management acquired these securities to meet cash needs and anticipated drawing upon these holdings to meet the projected shortage of spontaneously generated sources of funds.