Assume Marble is projecting a 20% increase in sales for the coming year, and that assets, all costs, and current liabilities are proportional to sales. Long-term debt is not proportional to sales. Assume
The ﬁrm's tax rate remains unchanged and the dividend payout is 40%. What is the external
ﬁnancing needed (EFN) for 2015 ($ in millions)?

Question

Quizplus · Accepted Answer

Given the information provided, we can use the following formula to calculate the EFN:

EFN = (A*/S)*∆S - (L*/S)*∆S - (M*(1 - D)*∆S)

Where: 
A* = the adjusted level of assets 
L* = the adjusted level of liabilities 
S = projected sales for the coming year 
M = the profit margin (calculated by dividing the net income by the sales) 
D = the dividend payout ratio

Using the proportional relationship between assets, costs, and current liabilities and assuming long-term debt is not proportional to sales, we can simplify the formula to:

EFN = 0.2A - 0.2L - 0.4M*A

Plugging in the given values:

EFN = 0.2A - 0.2A* - 0.4(0.06)*A

Simplifying:

EFN = 0.08A

Where A is the initial level of assets.

We are not given the initial level of assets, but we can use the information provided to calculate the asset turnover (AT) ratio:

AT = S/A = 1.2

Using the definition of the asset turnover ratio, we can solve for the initial level of assets:

A = S/AT = S/1.2

Plugging this into the EFN formula:

EFN = 0.08(S/1.2) = 0.067S

Since we are given that the projected sales for the coming year are $550 million, we can calculate the EFN:

EFN = 0.067(550) = 36.85

Therefore, the external financing needed for 2015 is approximately $36.85 million, which is closest to option B ($110.9 million).

Assume Marble Is Projecting a 20% Increase in Sales for the Coming