Given the following information: current assets = $400; ﬁxed assets = $500; accounts payable = $100; notes payable = $45; long-term debt = $455; equity = $300; sales = $450; costs = $400; tax
Rate = 34%. Suppose that current assets, costs, and accounts payable maintain a constant ratio to
Sales. If the ﬁrm is producing at 80% capacity, what is the total external ﬁnancing needed if sales
Increase 25%? Assume the ﬁrm pays no dividends.
A) $33.75
B) $66.25
C) $143.75
D) $172.50
E) $380.25

Question

Quizplus · Accepted Answer

To find the total external financing needed, first calculate the new sales level, which is 125% of the current sales: $450 * 1.25 = $562.50. Since the firm is operating at 80% capacity, it can increase sales by 25% without needing additional fixed assets. Current assets, costs, and accounts payable will increase proportionally with sales. Calculate the increase in current assets and accounts payable, then determine the increase in retained earnings from the increased profit. The difference between the increase in assets and the increase in liabilities and retained earnings is the external financing needed. The correct calculation results in $33.75.

Given the Following Information: Current Assets = $400; ﬁXed Assets