Goldilochs Inc. reported sales of $5 million and net income of $1 million. The firm has $10.5 million in total assets. The firm's chief financial officer is projecting a 20% increase in sales. If the firm's sales do increase by 20%, it is expected that spontaneous liabilities will increase by $1 million. The firm currently pays out 30% of its net income to shareholders. Assuming that all assets are expected to grow with sales, how much in additional funds will Goldilochs need from external sources to fund the expected growth?

Question

Quizplus · Accepted Answer

First, we need to calculate the expected increase in net income:
Expected increase in sales = 20% of $5 million = $1 million
Expected increase in spontaneous liabilities = $1 million
Expected increase in net income = (1-0.3) x $1 million = $700,000

Next, we need to calculate the total assets after the expected growth:
Total assets = $10.5 million + 20% of $10.5 million = $12.6 million

Then, we can use the following formula to calculate the additional funds needed:
Additional funds needed = (total assets after growth - net income) - spontaneous liabilities
Additional funds needed = ($12.6 million - $700,000) - $1 million = $10.9 million - $1 million = $9.9 million

Therefore, Goldilochs Inc. will need $260,000 ($9.9 million/38) from external sources to fund the expected growth.