680 165 200 $ 305 Hungry Kids 2012 Balance Sheet 950 3,140 6,600 $ 8,075 $ 8,075
ID: 2762256 • Letter: 6
Question
680
165
200
$
305
Hungry Kids
2012 Balance Sheet
950
3,140
6,600
$
8,075
$
8,075
Hungry Kids is currently operating at full capacity. The profit margin and the dividend payout ratio are held constant. Net working capital and fixed assets vary directly with sales. Sales are projected to increase by 4 percent. What is the external financing need?
a. $64
b. $20
c. $63
d. $62
e. $21
Hungry Kids2012 Income Statement Net sales $ 4,600 Cost of goods sold 3,250 Depreciation
680
Earnings before interest and taxes $ 670 Interest paid165
Taxable Income $ 505 Taxes200
Net income$
305
Dividends $ 64 Addition to retained earnings $ 241Explanation / Answer
Sales are expected to increase by 4% and it is in proportion to NWC and Fixed Assets
Net Working capital of Hungry Kids:
Accounts receivable 460
Inventory 950
Cash 65
Accounts payable -1275
Net working capital 200
Fixed Assets 6600
Incremental fixed assets in proportion to sales = 6600*104% = 6864
External financing need is based on debt equity ratio
Equity and retained earnings = 5240 (2100+3140)
Long term debt = 1560
Debt equity ratio = 1 : 3.3
Therefore external financing need = 1560/4.3*1 = 62
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