Question

Owen’s Electronics has nine operating plants in seven southwestern states. Sales for last year were \(100 million, and the balance sheet at year-end is similar in percentage of sales to that of previous years (and this will continue in the future). All assets (including fixed assets) and current liabilities will vary

directly with sales. The firm is working at full capacity.

BALANCE SHEET (in \) million)
Assets		Liabilities and Stockholder’s equity
Cash	\(7	Accounts payable	\)20
Accounts receivable	25	Accrued wages	7
Inventory	28	Accrued taxes	13
Current assets	\(60	Current liabilities	\)40
Fixed assets	45	Notes payable	15
		Common stock	20
		Retained earnings	30
Total assets	\(105	Total liabilities and stockholder’s equity	\)105

Owen’s has an aftertax profit margin of 10 percent and a dividend payout

ratio of 45 percent. If sales grow by 20 percent next year, determine how many dollars of new funds are needed to finance the growth.

Short answer

The required new funds needed by an organization to finance the growth is $6.4 million.

Step-by-step solution

Change in sales

$\begin{array}{rcl}\mathrm{Change}\mathrm{in}\mathrm{sales}& =& \mathrm{Existing}\mathrm{sales}\times \mathrm{Growth}\mathrm{percentage}\\ & =& \$100\mathrm{million}\times 20\%\\ & =& \$20\mathrm{million}\end{array}$

Assets to sales ratio

$\begin{array}{rcl}\mathrm{Assets}\mathrm{to}\mathrm{sales}\mathrm{ratio}& =& \frac{\mathrm{Total}\mathrm{assets}}{\mathrm{Sales}}\\ & =& \frac{\$105\mathrm{million}}{\$100\mathrm{million}}\\ & =& 1.05\mathrm{million}\end{array}$

Liabilities to sales ratio

$\begin{array}{rcl}\mathrm{Liabilities}\mathrm{to}\mathrm{sales}\mathrm{ratio}& =& \frac{\mathrm{Liabilities}}{\mathrm{Sales}}\\ & =& \frac{\$40\mathrm{million}}{\$100\mathrm{million}}\\ & =& 0.40\end{array}$

New sales level

$\begin{array}{rcl}\mathrm{New}\mathrm{sales}\mathrm{level}& =& \mathrm{Existing}\mathrm{sales}+\mathrm{Increase}\mathrm{in}\mathrm{sales}\\ & =& \$100\mathrm{million}+\$20\mathrm{million}\\ & =& \$120\mathrm{million}\end{array}$

Required new funds

$\begin{array}{rcl}RNF& =& \frac{A}{S}\left(∆S\right)-\frac{L}{S}∆S-P{S}_2\left(1-D\right)\\ & =& \frac{105}{100}\left(20\right)-\frac{40}{100}\left(20\right)-0.10\times 120\left(1-0.45\right)\\ & =& 21-8-6.6\\ & =& \$6.4million\end{array}$