Baxter Box Company\'s balance sheet showed the following amounts as of December

Question

Baxter Box Company's balance sheet showed the following amounts as of December 31st:

Cash $10 Accounts payable $15
Accounts receivable $40 Accruals $5
Inventory $50 Notes payable $20
Net fixed assets $100 Long-term debt $20
Common stock $20
____ Retained earnings $120
Total assets $200 Total liabilities and equity $200

Last year the firm's sales were $2,000, and it had a profit margin of 10 percent and a dividend payout ratio of 50 percent. Baxter Box operated its fixed assets at 80 percent of capacity during the year. The company expects to increase next year's sales by 37.5 percent, to $2,750, but the profit margin is expected to fall to 3 percent, and the dividend payout ratio is expected to rise to 60 percent. What is Baxter Box's additional funds needed (AFN) for next year?

Explanation / Answer

AFN with excess capacity Answer: a Diff: M S0 = $2,000; S1 = $2,750; SCapacity = $2,000/0.80 = $2,500. Target fixed assets to sales ratio = = = 0.04. New fixed assets level = 0.04 ´ $2,750 = $110. Balance sheet solution: Cash $ 13.75 Accounts payable $ 20.625 Accounts receivable 55.00 Accrued liabilities 6.875 Inventories 68.75 Notes payable 20.000 Net fixed assets 110.00 Long-term debt 20.000 Common stock 20.000 Retained earnings 153.000 Total liabilities Total assets $247.50 and equity $240.500 Addition to retained earnings = $2,750 ´ 0.03 ´ 0.40 = $33.00. AFN = $247.50 - $240.50 = $7.0

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