The Manning Company has financial statements as shown next, which are representa

Question

The Manning Company has financial statements as shown next, which are representative of the company’s historical average.

The firm is expecting a 30 percent increase in sales next year, and management is concerned about the company’s need for external funds. The increase in sales is expected to be carried out without any expansion of fixed assets, but rather through more efficient asset utilization in the existing store. Among liabilities, only current liabilities vary directly with sales.

  

  

  

Using the percent-of-sales method, determine whether the company has external financing needs, or a surplus of funds. (Hint: A profit margin and payout ratio must be found from the income statement.) (Do not round intermediate calculations.)

The Firm ___(Needs or Has), _______, ______ (In external Funds or In Surplus Funds).

Income Statement Sales $ 210,000 Expenses 154,100 Earnings before interest and taxes $ 55,900 Interest 8,200 Earnings before taxes $ 47,700 Taxes 16,200 Earnings after taxes $ 31,500 Dividends $ 9,450

Explanation / Answer

1. Computation of Surplus Funds

Profit Margin = Earnings after tax / Sales = 31500 / 210000 = 15%

Payout Ratio = Dividends / Earnings after tax = $9450 / $31500 = 30%

Projected Sales = Current Sales * ( 1 + Increase in Sales)

Projected Sales = $210000 * ( 1 + 0.30) = $273000

Change in Sales S' = $63000

Surplus Funds = - Current Assets * Change in Sales / Current Sales - Current Liabilities * Change in Sales / Current Sales - Profit Margin * Projectedd Sales * (1 - Payout ratio)

Surplus Funds = - $115500 * $63000 / $210000 + $25200 * $63000 / $210000 + 0.15 * $273000 * (1 - 0.30)

Surplus Funds = -$34650 + $7560 + $28665

Surplus Funds = $1575

The Firm Has $1575 in Surplus Funds

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