Jones Company's sales last year were $25 million, and its total assets were $8 million. Accounts payable were $2 million, and common stock and retained earnings were $5 million. Jones' sales are forecasted to be $30 million this year, earnings after tax are expected to be 3% of sales, and dividends of $250,000 are expected to be paid. Assuming that the ratio of assets to sales and current liabilities to sales remain the same this year as last year, determine the amount of additional financing required.

Question

Quizplus · Accepted Answer

The asset-to-sales ratio is $8 million / $25 million = 0.32. For $30 million in sales, assets should be $30 million * 0.32 = $9.6 million. The current liabilities-to-sales ratio is $2 million / $25 million = 0.08. For $30 million in sales, current liabilities should be $30 million * 0.08 = $2.4 million. Earnings after tax are 3% of $30 million = $0.9 million. Retained earnings after dividends are $0.9 million - $0.25 million = $0.65 million. Additional financing required is $9.6 million - ($8 million + $0.65 million) = $0.95 million. However, since the current liabilities increase by $0.4 million, the net additional financing required is $0.95 million - $0.4 million = $0.55 million.

Jones Company's Sales Last Year Were $25 Million, and Its