Suppose that Team Industries, Inc. currently has the balance sheet shown as follows, and that sales for the year just ended were $3 million. The firm also has a profit margin of 20 percent, a retention ratio of 30 percent, and expects sales of $6 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?
$$\begin{array} { l r l l l }
\text { Assets } & & { \text { Liabilities and Equity } } \
\text { Current Assets } & \$ 2,000,000 & \text { Current Liabilities } & \$ 2,000,000 \
\text { Fixed Assets } & 2,500,000 & \text { Long-tern Debt } & 1,500,000 \
& & \text { Equity } & 1,000,000 \
\text { Total Assets } & \$ 4,500,000 & \text { Total Liabilities ard Equity } & \$ 4,500,000
\end{array}$$
A) $2,140,000
B) $2,320,000
C) $2,500,000
D) $4,500,000

Question

Suppose that Team Industries, Inc. currently has the balance sheet shown as follows, and that sales for the year just ended were $3 million. The firm also has a profit margin of 20 percent, a retention ratio of 30 percent, and expects sales of $6 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?
$$\begin{array} { l r l l l } 
 \text { Assets } & & { \text { Liabilities and Equity } } \
\text { Current Assets } & \$ 2,000,000 & \text { Current Liabilities } & \$ 2,000,000 \
\text { Fixed Assets } &  2,500,000 & \text { Long-tern Debt } & 1,500,000 \
& & \text { Equity } & 1,000,000 \
\text { Total Assets } & \$ 4,500,000 & \text { Total Liabilities ard Equity } & \$ 4,500,000
\end{array}$$
A) $2,140,000
B) $2,320,000
C) $2,500,000
D) $4,500,000

Quizplus · Accepted Answer

The company's sales are expected to double from $3 million to $6 million, which implies that its assets and current liabilities will also double if they increase with sales. The current assets will increase by $2,000,000 (from $2,000,000 to $4,000,000), and the fixed assets will increase by $2,500,000 (from $2,500,000 to $5,000,000), totaling an increase in assets of $4,500,000. The current liabilities will increase by $2,000,000 (from $2,000,000 to $4,000,000). The net increase in assets after accounting for the increase in current liabilities is $2,500,000. However, the company retains 30% of its earnings (profit), and with a profit margin of 20% on $6 million in sales, the profit is $1.2 million, of which 30% is $360,000. This retained earnings will reduce the need for external funds, so the additional funds needed from external sources are $2,500,000 - $360,000 = $2,140,000.

Suppose That Team Industries, Inc A) $2,140,000 B) $2,320,000 C) $2,500,000 D) $4,500,000

Suppose That Team Industries, Inc A) $2,140,000
B) $2,320,000
C) $2,500,000
D) $4,500,000