Suppose that Wall-E Corp. currently has the balance sheet shown below, and that

Question

Suppose that Wall-E Corp. currently has the balance sheet shown below, and that sales for the year just ended were $6.0 million. The firm also has a profit margin of 30 percent, a retention ratio of 20 percent, and expects sales of $8.0 million next year. Fixed assets are currently fully utilized, and the nature of Wall-E’s fixed assets is such that they must be added in $1 million increments.

If current assets and current liabilities are expected to grow with sales, what amount of additional funds will Wall-E need from external sources to fund the expected growth?

Assets Liabilities and Equity   Current assets $ 1,800,000 Current liabilities $ 1,620,000   Fixed assets 3,960,000 Long-term debt 2,000,000 Equity 2,140,000   Total assets $ 5,760,000 Total liabilities and equity $ 5,760,000

Explanation / Answer

expected sales=$8m = $8000000

profit margin= 30%= $2400000

less dividend (80%)= 1920000 (note: payout ratio = 80%, since retention ratio is 20%)

retained earnings = $480000

sales have increased from $6m to $ 8m , that is 33.33%

BALANCE SHEET

ASSETS

current assets=(1800000 +33.33%)= 2400000

fixed assets= (3960000 + $1m) =     4960000

total assets= $7360000

LIABILITIES

current liabilities (1620000 +33.33%)=    2160000

retained earnings=                                      480000

long term debt=                                         2000000

equity=                                                       2140000

Total liabilities                                       $6780000

external funds requirement= total assets - total liabilities= 7360000- 6780000= $580000

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