The 2004 balance sheet for American Pulp and Paper is shown below (in millions o
ID: 2733913 • Letter: T
Question
The 2004 balance sheet for American Pulp and Paper is shown below (in millions of dollars):
Cash $3.0
Accounts payable 2.0
Accounts receivable $3.0
Notes payable 1.5
Inventory $5.0
Current Assets $11.0
Current liabilities $3.5
Fixed Assets 3.0
Long-term debt 3.0
Common equity 7.5
Total Assets $14.0
Total liabilities and equity $14.0
a) In 2004, sales were $60 million. In 2005, management believes that sales will increase by 20 percent to a total of $72 million. The profit margin is expected to be 5 percent, and the dividend payment ratio is targeted at 40 percent. No excess capacity exists. What is the additional financing requirement (in millions) for 2005 using the formula method?
b) How much can sales grow above the 2004 level of $60 million without requiring any additional funds?
Explanation / Answer
A additional fund needed Projected increase in assets – spontaneous increase in liabilities – any increase in retained earnings additional fund needed 11.64 sales in 2014 60 increased t0 72 increase in sales 12 amount of profit 0.6 dividend paid 40% 0.24 increase in retained earnings 0.36 B there would not be any change in sales without additional finance because no exccess capacity exist so no additional sales is possible without additional finance
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