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Chapter 2: 1CP_a (page 122)

Mansfield Corporation had 20X1 sales of \(100 million. The balance sheet items that vary directly with sales and the profit margin are as follows:

Percent

Cash

5%

Accounts receivable

15

Inventory

20

Net fixed assets

40

Accounts payable

15

Accruals

10

Profit margin after tax

10%

The dividend payout rate is 50 percent of earnings, and the balance in retained earnings at the end of 20X1 was \)33 million. Notes payable are currently \(7 million. Long-term bonds and common stock are constant at \)5 million and $10 million, respectively.

a. How much additional external capital will be required for next year if sales

increase 15 percent? (Assume that the company is already operating at full

capacity.)

Short Answer

Expert verified

The additional external capital required by the company amounts to $2.50 million.

Step by step solution

01

Change in sales

Changeinsales=Existingsales脳Growthratio=$100million脳15%=$15million

02

Assets to sales ratio

Assetstosalesratio=Cash+Accountsreceivables+Inventory+Netfixedassets=5%+15%+20%+40%=80%

03

Liabilities to sales ratio

Liabilitiestosalesratio=Accountspayable+Accruals=15%+10%=25%

04

New sales level

Newsaleslevel=Existingsales+Increaseinsales=$100million+$15million=$115million

05

Required new funds

Requirednewfunds=Assetstosalesratio脳Changeinsales-Liabilitiestosalesratio脳Chnageinsales-Profitmargin脳Newsaleslevel1-Dividendpayoutratio=0.80脳$15million-0.25脳$15million-0.10脳$115million1-0.50=$12million-$3.75million-$6.75million=$2.50million

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Most popular questions from this chapter

Easter Egg and Poultry Company has \(2,000,000 in assets and \)1,400,000 of debt. It reports net income of $200,000.

c. If the firm has an asset turnover ratio of 2.5 times, what is the profit margin

(return on sales)?

For December 31, 20X1, the balance sheet of Baxter Corporation was as follows:

Current assets

Liabilities

Cash

\(15,000

Accounts payable

\)17,000

Accounts receivable

20,000

Notes payable

25,000

Inventory

30,000

Bonds payable

55,000

Prepaid expenses

12,500

Fixed assets

Stockholder鈥檚 equity

Plant and equipment (gross)

Less: accumulated depreciation

\(255,000

51,000

Preferred stock

\)25,000

Net plant and equipment

\(204,000

Common stock

60,000

Paid in capital

30,000

Retained earnings

69,500

Total assets

\)281,500

Total liabilities and stockholder鈥檚 equity

\(281,500

Sales for 20X2 were \)245,000, and the cost of goods sold was 60 percent of sales. Selling and administrative expense was \(24,500. Depreciation expense was 8 percent of plant and equipment (gross) at the beginning of the year. Interest expense for the notes payable was 10 percent, while the interest rate on the bonds payable was 12 percent. This interest expense is based on December 31, 20X1 balances. The tax rate averaged 20 percent.

\)2,500 in preferred stock dividends were paid, and \(5,500 in dividends were paid to common stockholders. There were 10,000 shares of common stock outstanding.

During 20X2, the cash balance and prepaid expenses balances were

unchanged. Accounts receivable and inventory increased by 10 percent. A new machine was purchased on December 31, 20X2, at a cost of \)40,000. Accounts payable increased by 20 percent. Notes payable increased by \(6,500 and bonds payable decreased by \)12,500, both at the end of the year. The preferred stock, common stock, and paid-in capital in excess of par accounts did not change.

a. Prepare an income statement for 20X2.

Discuss some financial variables that affect the price-earnings ratio

Identify whether each of the following items increases or decreases cash flow:

Increase in accounts receivable

Decrease in prepaid expenses

Increase in notes payable

Increase in inventory

Depreciation expense

Dividend payment

Increase in investment

Increase in accrued expenses

Decrease in account payable

Jerry Rice and Grain Stores has \(4,780,000 in yearly sales. The firm earns 4.5 percent on each dollar of sales and turns over its assets 2.7 times per year. It has \)123,000 in current liabilities and $349,000 in long-term liabilities.

b. If the asset base remains the same as computed in part a, but total asset

turnover goes up to 3, what will be the new return on stockholders鈥� equity?Assume that the profit margin stays the same as do current and long-term

liabilities.
See all solutions

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