Suppose that Wave Industries currently has the balance sheet shown as follows, and that sales for the year just ended were $25 million. The firm also has a profit margin of 10 percent, a retention ratio of 20 percent, and expects sales of $27 million next year. If fixed assets have enough capacity to cover the increase in sales and all other 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?
$$\begin{array} { l r r l r }
\text { Assets } && { \text { Liabilities ard Equity } } \
\text { Current Assets } & \$ 6,500,000 & \text { Current Liabilities } & \$ 4,000,000 \
\text { Fixed Assets } & 13,000,000 & \text { Long-tem Debt } & { 6,500,000 } \
& & \text { Equity } & 9,000,000 \
\text { Total Assets } & \$ 19,500,000 & \text { Total Liabilities and Equity } & \$ 19,500,000
\end{array}$$
A) $0
B) $300,000
C) $340,000
D) $20,000

Question

Suppose that Wave Industries currently has the balance sheet shown as follows, and that sales for the year just ended were $25 million. The firm also has a profit margin of 10 percent, a retention ratio of 20 percent, and expects sales of $27 million next year. If fixed assets have enough capacity to cover the increase in sales and all other 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?
$$\begin{array} { l r r l r } 
 \text { Assets } && { \text { Liabilities ard Equity } } \
\text { Current Assets } & \$  6,500,000 & \text { Current Liabilities } & \$ 4,000,000 \
\text { Fixed Assets } &  13,000,000 & \text { Long-tem Debt } & { 6,500,000 } \
& &  \text { Equity } & 9,000,000 \
\text { Total Assets } & \$ 19,500,000 & \text { Total Liabilities and Equity } & \$ 19,500,000
\end{array}$$
A) $0
B) $300,000
C) $340,000
D) $20,000

Quizplus · Accepted Answer

The company will need $300,000 in additional funds from external sources to fund the expected growth. This is calculated as follows:* Net income = Sales * Profit margin = $25 million * 10% = $2.5 million* Retained earnings = Net income * Retention ratio = $2.5 million * 20% = $500,000* Increase in sales = $27 million - $25 million = $2 million* Increase in assets = Increase in sales * Asset turnover ratio = $2 million * 1.2 = $2.4 million* Increase in equity = Retained earnings + New equity = $500,000 + $0 = $500,000* Increase in debt = Increase in assets - Increase in equity = $2.4 million - $500,000 = $1.9 million* Additional funds needed = Increase in debt = $1.9 million

Suppose That Wave Industries Currently Has the Balance Sheet Shown