The Danville Company is considering a $50 million expansion (capital expenditure)program next year. Next year, the company expects to earn $25 million after interest and taxes. The company also plans to increase its dividends from $5 million to $7 million. If the expansion program is accepted, the company expects working capital requirements to increase by approximately $8 million next year. Long-term debt retirement obligations total $3 million next year and depreciation is expected to be $13 million. No fixed assets are expected to be sold next year. How much additional financing will be needed if the expansion program is undertaken?

Question

Quizplus · Accepted Answer

The correct answer is A. $30 million. The additional financing needed is calculated as follows:Capital expenditure program: $50 millionIncrease in working capital: $8 millionTotal financing needed: $58 millionLess:Earnings after interest and taxes: $25 millionDepreciation: $13 millionLong-term debt retirement: $3 millionTotal funds available: $41 millionAdditional financing needed: $58 million - $41 million = $30 million

The Danville Company Is Considering a $50 Million Expansion (Capital