A firm with sales of $1000 has the following balance sheet. Corporation XYZ Balance Sheet as of June 30, 20XX Assets Liabilities and Equity Accounts receivable $200 Accounts payable $200 Inventory 400 Long?term debt 300 Plant 400 Equity 500 $1,000 $1,000 ? If the firm earns 10 percent after taxes on sales and pays no dividends, ? a. Determine the entries for a

Question

new balance sheet for sales of $1,500 using the percent of sales. b. the firm need external financing? c. Construct a new balance sheet using the estimates obtained in a. If necessary, issue new stock to cover any external financing needs. If the firm has excess funds, retire the accounts payable.

What will be an ideal response?

Answer 1

a.Each asset (accounts receivable and inventory) and each liability (accounts payable) that spontaneously varies with sales increases by 50%. Since the firm earns 10% after tax on sales of $1,500 and pays no dividends, equity increases by $150. The new entries for the balance sheet are        accounts receivable      $300   +$100        inventory                       600   +  200        accounts payable           300  +   100        equity                           650   +   150
?b.The expansion in assets exceeds the expansion in liabilities plus equity by $50, so the firm will need additional external sources of finance. Possible sources include (1) a new loan from a commercial bank, (2) new long-term debt, or (3) new equity.?The same conclusion that the firm will need $50 in external financing can be determined by the following equation:        EFR = .6($500) - .2($500) - $150 = $50.
?c.If the firm issues new stock, the balance sheet becomes:                            Corporation XYZ                   Balance Sheet as of June 30, 20XX                Assets                             Liabilities and Equity       Accounts receivable  $  300   Accounts payable   $300       Inventory                      600   Long?term debt         300       Plant                             400   Equity                      700                                       $1,300                              $1,300