Goldilochs Inc. reported sales of $8 million and net income of $2 million. The firm has a total asset turnover of 3.2. The firm's chief financial officer is projecting a $5 million increase in sales and that spontaneous liabilities will increase by $350,000 automatically. The firm currently pays out 80% of its net income to shareholders. Assuming that all assets and current liabilities 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 current total assets:
Total Asset Turnover = Sales / Total Assets
3.2 = $8,000,000 / Total Assets
Total Assets = $2,500,000

Next, we can calculate the current spontaneous liabilities:
Spontaneous Liabilities = Total Asset Turnover x Total Assets - Sales
Spontaneous Liabilities = 3.2 x $2,500,000 - $8,000,000
Spontaneous Liabilities = $400,000

Given that the spontaneous liabilities will automatically increase by $350,000, the new total spontaneous liabilities will be:
New Spontaneous Liabilities = $400,000 + $350,000
New Spontaneous Liabilities = $750,000

We can calculate the expected sales:
Expected Sales = Current Sales + Projected Sales Increase
Expected Sales = $8,000,000 + $5,000,000
Expected Sales = $13,000,000

We can use the total asset turnover to calculate the new total assets:
Total Assets = Expected Sales / Total Asset Turnover
Total Assets = $13,000,000 / 3.2
Total Assets = $4,062,500

We know that all assets and current liabilities will grow with sales, so we can estimate the new spontaneous liabilities:
New Spontaneous Liabilities = Total Asset Turnover x Total Assets - Expected Sales
New Spontaneous Liabilities = 3.2 x $4,062,500 - $13,000,000
New Spontaneous Liabilities = $750,000

Therefore, the increase in spontaneous liabilities is equal to the amount of the projected increase, and there is no need to raise additional funds from external sources.

The answer is B, $562,500.