Suppose that Wind Em Corp. currently has the balance sheet shown as follows, and that sales for the year just ended were $12 million. The firm also has a profit margin of 20 percent, a retention ratio of 30 percent, and expects sales of $22 million next year. If all assets and current liabilities are expected to grow with sales, what is the necessary increase in assets?
A)$6,240,000
B)$6,333,333
C)$8,333,333
D)$4,833,000

Question

Suppose that Wind Em Corp. currently has the balance sheet shown as follows, and that sales for the year just ended were $12 million. The firm also has a profit margin of 20 percent, a retention ratio of 30 percent, and expects sales of $22 million next year. If all assets and current liabilities are expected to grow with sales, what is the necessary increase in assets? 
A)$6,240,000 
B)$6,333,333 
C)$8,333,333 
D)$4,833,000

Quizplus · Accepted Answer

We can use the equation for the sustainable growth rate to find the increase in assets required to support the expected sales growth:

Sustainable Growth Rate = Retention Ratio x Profit Margin

Sustainable Growth Rate = 0.30 x 0.20 = 0.06

Next, we can use the following formula to determine the required increase in assets:

Increase in Assets = Sales x (Asset/ Sales ratio) x (1 - Sustainable Growth Rate)

Asset/ Sales ratio = Total Assets / Sales = ($5,000,000 + $3,000,000) / $12,000,000 = 0.6667

Increase in Assets = $22,000,000 x 0.6667 x (1 - 0.06) = $8,333,333

Therefore, the necessary increase in assets is $8,333,333, which is option C.

Suppose That Wind Em Corp