The Danville Company is considering a $50 million expansion (capital expenditure) program next year. The company wants to determine approximately how much additional financing will be needed if the expansion program is undertaken. The company expects to earn $25 million after interest and taxes next year. The company also plans to increase its dividends from $5 million to $7 million. If the expansion program is accepted, the company expects working capital requirements to increase by approximately $8 million next year. Long-term debt retirement obligations total $3 million next year, and depreciation is expected to be $13 million. No fixed assets are expected to be sold next year.

Question

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The correct answer is A. The company expects to earn $25 million after interest and taxes next year. The company also plans to increase its dividends from $5 million to $7 million. If the expansion program is accepted, the company expects working capital requirements to increase by approximately $8 million next year. Long-term debt retirement obligations total $3 million next year, and depreciation is expected to be $13 million. No fixed assets are expected to be sold next year. So, the company will need to finance the $50 million expansion program plus the $8 million increase in working capital requirements, minus the $3 million in long-term debt retirement obligations, minus the $13 million in depreciation, for a total of $30 million.

The Danville Company Is Considering a $50 Million Expansion (Capital