Great Subs believes it can increase sales by 50% without any increase in net fixed assets. Earnings after tax are expected to be $2,000. The company pays no dividends. What additional financing will Subs need to fund this growth? Subs' current balance sheet is as follows: $\begin{array}{|l|r|r|r|}
\hline \text { Cash } & \$ 2,500 & \text { Accounts Payable } & \$ 5,600 \
\hline \text { Accounts Rec. } & 4,400& \text { Notes Payable } & 10,000 \
\hline \text { Inventory } & 6,000 &\text { Long-term Debt } & 15,000 \
\hline \text { Fixed Assets, net } & 47,700& \text { Stockholders' Equity } & 30,000 \
\hline&\$60,600&&\$60,600\
\hline
\end{array}$
A) $3,350 surplus -- no additional financing needed
B) $1,650
C) $3,650
D) None of these are correct

Question

Quizplus · Accepted Answer

The increase in sales by 50% implies an increase in current assets by 50% (assuming proportional growth). The current assets are $12,900, so they will increase by $6,450. The spontaneous liabilities (accounts payable) will also increase by 50%, which is $2,800. The earnings after tax of $2,000 will be retained, reducing the need for external financing. Therefore, the additional financing needed is $6,450 - $2,800 - $2,000 = $1,650.

Great Subs Believes It Can Increase Sales by 50% Without