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 $2,480, current assets of $820, current liabilities of $510, net fixed assets of $1,670, 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 10 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

Calculation of additional equity financing required for next year:

Increase in Current Assets   = 820 *10% =

$    82.00

Less: Increase in current liabilities = 510 *10% =

$ (51.00)

Add: Increase in net fixed assets = 1670*10% =

$ 167.00

Less: Increase in profits   = 2480*5%*10% =

$ (12.40)

Additional equity financing required for next year =

$ 185.60

Calculation of additional equity financing required for next year:

Increase in Current Assets   = 820 *10% =

$    82.00

Less: Increase in current liabilities = 510 *10% =

$ (51.00)

Add: Increase in net fixed assets = 1670*10% =

$ 167.00

Less: Increase in profits   = 2480*5%*10% =

$ (12.40)

Additional equity financing required for next year =

$ 185.60

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