The Bouchard Company\'s sales are forecasted to increase from $500 in 2007 to $1
ID: 2613735 • Letter: T
Question
The Bouchard Company's sales are forecasted to increase from $500 in 2007 to $1000 in 2008. Here is the December 31, 2007 balance sheet:
Cash
50
Accounts payable
25
Receivables
100
Notes payable
75
Inventory
100
Accruals
25
Total current assets
250
Total current liabilities
125
Long-term debt
200
Common stock
50
Net fixed assets
250
Retained earnings
125
Total assets
500
Total liab/equity
500
Bouchard's fixed assets were used to only 50 percent of capacity during 2007, but its current assets were at their proper levels. All assets except fixed assets should be at a constant percentage of sales, and fixed assets would also increase at the same rate if the current excess capacity did not exist. Bouchard's after-tax profit margin is forecasted to be 8 percent, and its payout ratio will be 40 percent. What is Bouchard's additional funds needed for the current year?
Cash
50
Accounts payable
25
Receivables
100
Notes payable
75
Inventory
100
Accruals
25
Total current assets
250
Total current liabilities
125
Long-term debt
200
Common stock
50
Net fixed assets
250
Retained earnings
125
Total assets
500
Total liab/equity
500
Explanation / Answer
We have
Forecasted sales = 1000
Profit margin =8%
Pay-out ratio = 40%
From the above given information, we can compute net addition to retained earnings:
Net Profit = 1000 x 8% = 80
(-) Dividend 80 x40% =-32
Addition to retained earnings = 48
Sales is doubled, therefore current assets and current liabilities will also get doubled.
New Total current assets = 250x2 = 500
New Total current liabilities=125x2 =250
Net fixed assets will remain the same as it is utilized only 50% and sufficient for increase in sales.
We have the following formula to compute additional fund needed
Additional funds needed = new fixed assets + new current liabilities – new current liabilities – old long term debt- old common stock –old retained earnings – addition to retained earnings
=500 +250 -250-200 -50-125-48
=77
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