Suppose that BBM Industries, Inc. currently has the balance sheet shown as follows, and that sales for the year just ended were $2 million. The firm also has a profit margin of 5 percent, a retention ratio of 50 percent, and expects sales of $2.5 million next year. If all assets and current liabilities are expected to increase with sales, what amount of additional funds will the company need from external sources to fund the expected growth?
$$\begin{array} { l r l l l }
\text { Assets } & & { \text { Liabilities and Equity } } \
\text { Current Assets } & \$ 1,000,000 & \text { Current Liabilities } & \$ 1,000,000 \
\text { Fixed Assets } & 2,000,000 & \text { Long-tern Debt } & 1,000,000 \
& & \text { Equity } & 1,000,000 \
\text { Total Assets } & \$ 3,000,000 & \text { Total Liabilities ard Equity } & \$ 3,000,000
\end{array}$$
A) $0
B) $62,500
C) $437,500
D) $500,000

Question

Suppose that BBM Industries, Inc. currently has the balance sheet shown as follows, and that sales for the year just ended were $2 million. The firm also has a profit margin of 5 percent, a retention ratio of 50 percent, and expects sales of $2.5 million next year. If all assets and current liabilities are expected to increase with sales, what amount of additional funds will the company need from external sources to fund the expected growth?
$$\begin{array} { l r l l l } 
 \text { Assets } & & { \text { Liabilities and Equity } } \
\text { Current Assets } & \$ 1,000,000 & \text { Current Liabilities } & \$ 1,000,000 \
\text { Fixed Assets } &  2,000,000 & \text { Long-tern Debt } & 1,000,000 \
& & \text { Equity } & 1,000,000 \
\text { Total Assets } & \$ 3,000,000 & \text { Total Liabilities ard Equity } & \$ 3,000,000
\end{array}$$
A) $0
B) $62,500
C) $437,500
D) $500,000

Quizplus · Accepted Answer

The company's sales are expected to grow from $2 million to $2.5 million, a 25% increase. Since all assets and current liabilities are expected to increase with sales, both current assets and fixed assets will increase by 25%. The total assets before the increase are $3,000,000, so a 25% increase is $750,000, making the new total assets $3,750,000. The profit margin is 5%, so the profit on $2.5 million sales is $125,000. With a retention ratio of 50%, the company will retain $62,500 of its earnings, which can be used to finance part of the growth. Therefore, the additional funds needed from external sources are $750,000 (total growth in assets) - $62,500 (retained earnings) = $687,500. However, since current liabilities are also expected to increase with sales, the $1,000,000 in current liabilities will also increase by 25% or $250,000, making the new current liabilities $1,250,000. This additional $250,000 can be used to finance the growth, reducing the need for external funds to $437,500 ($687,500 - $250,000).

Suppose That BBM Industries, Inc A) $0 B) $62,500 C) $437,500 D) $500,000

Suppose That BBM Industries, Inc A) $0
B) $62,500
C) $437,500
D) $500,000