ICU, an eyeglass manufacturer, has current assets of $800,000 and net fixed assets of $1,400,000. The firm expects its sales to climb 25 percent next year from its current level of $3,500,000. ICU's only current liability is accounts payable of $1,200,000. If both current assets and current liabilities will increase proportionately with sales, what additional financing will be needed by ICU next year? Assume ICU has a net profit margin of 6 percent. An increase in net fixed assets of $500,000 will be required. The firm pays out 50 percent of its earnings as dividends.
A) $400,000
B) $358,750
C) $178,750
D) $268,750

Question

Quizplus · Accepted Answer

The additional financing needed is calculated by determining the increase in assets and liabilities due to the sales increase, the retained earnings, and the required increase in fixed assets. The increase in sales is $875,000 (25% of $3,500,000), leading to a proportional increase in current assets and liabilities. The increase in current assets is $200,000 (25% of $800,000), and the increase in current liabilities is $300,000 (25% of $1,200,000). The net profit is $262,500 (6% of $4,375,000), with $131,250 retained (50% payout). The total financing needed is $500,000 (fixed assets) + $200,000 (current assets) - $300,000 (current liabilities) - $131,250 (retained earnings) = $268,750.

ICU, an Eyeglass Manufacturer, Has Current Assets of $800,000 and Net