1CP_a Mansfield Corporation had 20X1 s... [FREE SOLUTION]

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Foundations Of Financial Management

Stanley B. Block, Geoffrey A. Hirt, Bartley Danielsen

Business Studies

16th Edition 路 768 pages

ISBN: 9781259277160

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

Change in sales

$\begin{array}{rcl} Change in sales & = & Existing sales 脳 Growth ratio \\ = & $ 100 million 脳 15 % \\ = & $ 15 million \end{array}$

Assets to sales ratio

$\begin{array}{rcl} Assets to sales ratio & = & Cash + Accounts receivables + Inventory + Net fixed assets \\ = & 5 % + 15 % + 20 % + 40 % \\ = & 80 % \end{array}$

Liabilities to sales ratio

$\begin{array}{rcl} Liabilities to sales ratio & = & Accounts payable + Accruals \\ = & 15 % + 10 % \\ = & 25 % \end{array}$

New sales level

$\begin{array}{rcl} New sales level & = & Existing sales + Increase in sales \\ = & $ 100 million + $ 15 million \\ = & $ 115 million \end{array}$

Required new funds

$\begin{array}{rcl} Required new funds & = & (Assets to sales ratio 脳 Change in sales) - (Liabilities to sales ratio 脳 Chnage in sales) - (Profit margin 脳 New sales level) (1 - Dividend payout ratio) \\ = & (0.80 脳 $ 15 million) - (0.25 脳 $ 15 million) - (0.10 脳 $ 115 million) (1 - 0.50) \\ = & $ 12 million - $ 3.75 million - $ 6.75 million \\ = & $ 2.50 million \end{array}$

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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

BALANCE SHEET End of year (in \) million)
Assets		Liabilities and Stockholder鈥檚 equity
Cash	\(25	Accounts payable	\)64
Accounts receivable	40	Accrued expenses	31
Inventory	82	Other payables	45
Plant and equipment	133	Common stock	50
		Retained earnings	90
Total assets	\(280	Total liabilities and stockholder鈥檚 equity	\)280

JONES CORPORATION
Current assets		Liabilities
Cash	\(20,000	Accounts payable	\)100,000
Accounts receivable	80,000	Bonds payable (long term)	80,000
Inventory	50,000
Long Term Assets		Stockholder鈥檚 Equity
Fixeed assets	\(500,000	Common Stock	\)150,000
Less: Accumulated Depreciation	(150,000)	Paid in capital	70,000
Net fixed assets*	350,000	Retained earnings	100,000
Total assets	\(500,000	Total Liab. And equity	\)500,000

JONES CORPORATION
Sales (on credit)	\(1,250,000
Cost of goods sold	750,000
Gross profit	\)500,000
Selling and administrative expenses	257,000
Less: depreciation expenses	50,000
Operating profits	\(193,000
Interest expenses	8,000
Earning before taxes	\)185,000
Tax expenses	92,500
Net income	\(92,500

SMITH CORPORATION
Current assets		Liabilities
Cash	\(35,000	Accounts payable	\)75,000
Marketable securities	7,500	Bonds payable (long term)	210,000
Accounts receivable	70,000
Inventory	75,000
Long term assets		Stockholder鈥檚 equity
Fixed assets	\(500,000	Common stock	\)75,000
Less: accumulated depreciation	250,000	Paid in capital	30,000
Net fixed assets*	250,000	Retained earnings	47,500
Total assets	\(437,500	Total liab. And equity	\)437,500

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Short Answer

Step by step solution

Change in sales

Assets to sales ratio

Liabilities to sales ratio

New sales level

Required new funds

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	Percent
Cash	5%
Accounts receivable	15
Inventory	20
Net fixed assets	40
Accounts payable	15
Accruals	10
Profit margin after tax	10%

SMITH CORPORATION
Sales (on credit)	\(1,000,000
Cost of goods sold	600,000
Gross profit	\)400,000
Selling and administrative expenses	224,000
Less: depreciation expenses	50,000
Operating profits	\(126,000
Interest expenses	21,000
Earning before taxes	\)105,000
Tax expenses	52,500
Net income	\(52,500