Goldilochs Inc. reported sales of $8 million and net income of $1.5 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 $500,000. 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?
A) $340,000
B) $299,000
C) $321,000
D) $360,000

Question

Quizplus · Accepted Answer

The correct answer is A.The firm's sales are expected to increase by 20%, which will lead to an increase in spontaneous liabilities of $500,000. The firm currently pays out 30% of its net income to shareholders, so the increase in net income will lead to an increase in dividends of $450,000 (0.30 * $1.5 million * 1.20). The firm's total assets are expected to grow with sales, so the increase in sales will lead to an increase in total assets of $1.68 million (0.20 * $8.4 million). The firm's total financing needs will be $2.63 million ($500,000 + $450,000 + $1.68 million). The firm's internal funds will be $1.95 million (0.70 * $1.5 million * 1.20). Therefore, the firm will need to raise $340,000 ($2.63 million - $1.95 million) from external sources.