The 2004 balance sheet for American Pulp and Paper is shown below (in millions o
ID: 2735501 • 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?
a) 12.28%, b) 14.63%, c)15.75%, d)17.65%, e)18.14%
Explanation / Answer
Where,
Ao = current level of assets
S/So = percentage increase in sales i.e. change in sales divided by current sales
Lo = current level of liabilities
S1 = new level of sales
PM = profit margin
b = retention rate = 1 – payout rate
Rentention rate=1-0.4=0.6
current sales=72mn/1.2=60mn
% in sales=20%
current assets=$14mn
l0=$6.5mn
s1=72mn
PM=5%
=-0.66
It means there is no need to raise additonal finace as more money is generated by increase in sales
b)Equate AFN=0. let rate be x%
14x-6.5x=60*(1+x)*5%*0.6
x=31.58%
Additional Funds Needed = Ao × S Lo × S - S1 × PM × b So SoRelated Questions
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