The Optical Scam Company has forecast a sales growth rate of 20 percent for next
ID: 2736915 • Letter: T
Question
The Optical Scam Company has forecast a sales growth rate of 20 percent for next year. Currenl assets, fixed assets, and shorl-tern debt are proportional to sales. The current financial stalements are shown here Sales Costs $31,500,000 26,641,500 Taxable income Taxes S 4,858,500 1,700,475 Net income S 3,158,025 Dividends Addition to retained earnings $ 1,263,210 1,894,815 BALANCE SHEET Assets Liabilities and Equity Current assets 7,310,000 Short-term debt S 5,985,000 4,130,000 Long-term debt Fixed assets 19,780,000 Common stock Accumulated retained earnings $ 4,080,000 12,895,000 s 16,975,000 S 27,090,000 Total equity Total assets 27,090,000 Total liabilities and equityExplanation / Answer
(‘a) Calculation of External Funds Needed in Next Year
Additional Funds Needed = Increase in Assets – Increase in Liabilities- Increase in retained earnings
Increase in Assets = Increase ion Current Assets + Increase in Fixed Assets
Increase in Assets = (Existing Current Assets x Sales Growth ) + ( Existing Fixed Assets x Sales Growth)
Increase in Assets = (7310,000 x 0.2 ) + (19780,000 x 0.2 ) = 5418,000
Increase in Liabilities = Existing Short Term Liability x Sales Growth
Increase in Liability = 5985,000 x 0.2 = 1197,000
Increase in Retained Earnings = Proposed Sales x Profit Margin x Retention Ratio
Increase in Retained Earnings= 37800,000 x 0.1003 x 0.6 = 2273, 778
External Finance Needed = 1947,222
(‘b) Pro forma Balance Sheet
Asset
Amount
Liabilities
Amount
Current Assets
8772,000
Short Term Debt
7182,000
Fixed Assets
237,36,000
Long Term Debt
4130,000
Additional Finance
1947,222
Common Stock
4080,000
Accumulated Retained Earnings
151,68,778
Total
325,08,000
Total
325,08,000
Asset
Amount
Liabilities
Amount
Current Assets
8772,000
Short Term Debt
7182,000
Fixed Assets
237,36,000
Long Term Debt
4130,000
Additional Finance
1947,222
Common Stock
4080,000
Accumulated Retained Earnings
151,68,778
Total
325,08,000
Total
325,08,000
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