Goldilochs Inc. reported sales of $8 million and net income of $2 million. The firm has a total asset turnover of 1.2. The firm's chief financial officer is projecting a $6 million increase in sales and that spontaneous liabilities will increase by $1 million automatically. The firm currently pays out 50 percent 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?
A) $1,250,000
B) $1,750,000
C) $2,500,000
D) $2,250,000

Question

Quizplus · Accepted Answer

To calculate the additional funds needed (AFN), we first determine the increase in total assets required to support the new sales level. With a total asset turnover of 1.2, the current assets are $8 million / 1.2 = $6.67 million. The projected sales are $8 million + $6 million = $14 million, requiring assets of $14 million / 1.2 = $11.67 million. The increase in assets needed is $11.67 million - $6.67 million = $5 million. Since spontaneous liabilities will increase by $1 million, the external financing needed for assets is $5 million - $1 million = $4 million. The firm retains 50% of its net income, so it retains $2 million * 50% = $1 million. Therefore, the additional funds needed from external sources are $4 million - $1 million = $3 million. However, none of the provided options match this calculation, indicating a possible mistake in my calculation or interpretation of the question's details based on the provided options. Reevaluating the approach or the question's details might be necessary to align with the given options.