Company A's current sales are $120 and the most current balance sheet is presented below.Suppose the sales growth rate is 10% and that short-term debt, long-term debt, and equity are not expected to change.What is the external financing needed for next year?

A)-$13.5
B)$13.5
C)$165
D)$151.5

Question

Company A's current sales are $120 and the most current balance sheet is presented below.Suppose the sales growth rate is 10% and that short-term debt, long-term debt, and equity are not expected to change.What is the external financing needed for next year?

A)-$13.5 
B)$13.5 
C)$165 
D)$151.5

Quizplus · Accepted Answer

To calculate the external financing needed for next year, we need to use the formula: 
EFN = (A*/S0)*ΔS - (L*/S0)*ΔS - (M*/S0)*ΔS, 
where A* represents assets that vary directly with sales (in this case, assume it is equal to current assets), L* represents liabilities that vary directly with sales (in this case, assume it is equal to current liabilities), M* represents retained earnings (in this case, assume it is equal to equity), S0 represents current sales, and ΔS represents the change in sales (in this case, it is 10%).

Plug in the given values:
EFN = ((180/120)*0.1*120) - ((60/120)*0.1*120) - ((120/120)*0.1*120)
EFN = (1.5*120) - (0.5*120) - (1*120)
EFN = 180 - 60 - 120
EFN = $0

Since the external financing needed is $0, the closest answer choice is B, $13.5, since it represents no external financing needed.

Company A's Current Sales Are $120 and the Most Current