Great Wall Co. assumes it can increase sales by 50 percent without any increase

Question

Great Wall Co. assumes it can increase sales by 50 percent without any increase in net fixed assets (All other assets will increase and accounts payable). Earnings after tax are expected to be $2,000. The company pays no dividends. What additional financing will Subs need to finance this growth? Subs balance sheet currently is as follows: Cash $ 2,500 Accounts payable $ 5,600 Accounts Rec. 4,400 Notes payable 10,000 Inventory 6,000 Long-term debt 15,000 Fixed assets, net 47,700 Stockholder's equity 30,000 $60,600 $60,600

Explanation / Answer

If Great Wall Co, wants to increase the sales by 50% without the increase in the fixed assets, then it has to increase the working capital with 50% as

increase in the current assets = 12900 * 50% = $6450

Increase in the current liability = 5600 * 50% = $2800

Increase in the retention of earnings = $2000 (no dividend payout)

So, total additional financing required =6450 - 2800 - 2000 = $1650

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