Question 7: (Forecasting) 8 points Jolly Joe\'s Novelties, Inc. had the financia

Question

Question 7: (Forecasting) 8 points Jolly Joe's Novelties, Inc. had the financial data shown below last year. Jolly Joe's has just invented a new toy which they expect will cause sales to double from $100,000 to $180,000, increasing net income to $12,000. From experience the company knows that when sales changes, all current assets plus accounts payable and accrued expenses change at the same percentage rate, and the company feels they can handle the increase without adding any fixed assets. a. Will Jolly Joe's need any new outside funding if they pay no dividends? b. If so, how much will be needed?

Original Assets Equity and Liability Fixed Assets 340,000 Debt 25,000 Current Assets 22,000.00 Equity 72,000 Retained Earnings 40,000 Total 362,000 Total 137,000 New Assets Equity and Liability Fixed Assets 340,000 Debt 25,000 Current Assets 22,000 Equity 80,000 Retained Earnings 40,000 Total 362,000 Total 145,000 Finance required:

Explanation / Answer

% increase in sales = (180000 - 100000) / 100000

= 80%

Current assets, accounts payable and accrued expenses increase at the rate of 80%

Amount of current assets would be 22000 + 80% = 39600

Increase in total assets = 39600 - 22000 = 17600

a. If Joe does not pay dividend that means no cash disbursement and the current assets are 39600, so the balance of liabilities is less than the assets side and additional funds would be needed.

b. Additional funds = 362000 + 17600 - 145000 = 234600

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