Jill's Wigs Inc.had the following balance sheet last year: Jill has just invented a non-slip wig for men which she expects will cause sales to double, increasing after-tax net income to $1,000.She feels that she can handle the increase without adding any fixed assets.(1) Will Jill need any outside capital if she pays no dividends? (2) If so, how much?

Question

Jill's Wigs Inc.had the following balance sheet last year:  Jill has just invented a non-slip wig for men which she expects will cause sales to double, increasing after-tax net income to $1,000.She feels that she can handle the increase without adding any fixed assets.(1) Will Jill need any outside capital if she pays no dividends? (2) If so, how much?

Quizplus · Accepted Answer

To determine if Jill needs outside capital, we must analyze the change in total assets and liabilities in relation to the projected after-tax net income.

Since Jill believes she can handle the sales increase without adding any fixed assets, we can assume that total assets will remain constant. Therefore, the increase in after-tax net income will only affect the liabilities and equity side of the balance sheet.

Using the formula: 
Assets = Liabilities + Equity

We can determine that equity will increase by $1,000 (after-tax net income). Therefore, the new balance sheet will look like this:

Assets: $93,000 
Liabilities: $20,000 
Equity: $74,000 ($73,000 + $1,000)

Since equity has increased, Jill can use this surplus to pay dividends or reinvest in the business. There is no need for Jill to raise outside capital since she can fund this growth internally.

Therefore, the answer is D, Jill will not need any outside capital if she pays no dividends.