Wagner Industrial Motors, which is currently operating at full capacity, has sal

Question

Wagner Industrial Motors, which is currently operating at full capacity, has sales of $2,120, current assets of $680, current liabilities of $340, net fixed assets of $1,490, and a 5 percent profit margin. The firm has no long-term debt and does not plan on acquiring any. The firm does not pay any dividends. Sales are expected to increase by 9 percent next year. If all assets, short-term liabilities, and costs vary directly with sales, how much additional equity financing is required for next year?

Explanation / Answer

Projected assests = (680 + 1490) * 1.09 = 2365.3

Projected liabilities = 340 * 1.09 = 370.6

current equity = 680 + 1490 - 340 = 1830

Projected increase in retained earnings = 2120 * 0.05 * 1.09 = 115.54

Equity funding needed = 2365.3 - 370.5 -1830 - 115.54 = 49.26

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