Nu Tek has sales of $19,700, net income of $3,517, fixed assets of $18,282, current liabilities of $2,940, current assets of $3,018, long-term debt of $7,600, and equity of $10,760. Assets, costs, and current liabilities are proportional to sales. Long-term debt and equity are not. The company maintains a constant 50 percent dividend payout ratio. Next year's sales are projected to increase by 7 percent. What is the amount of external financing needed if the firm is currently operating at full capacity?
A) −$596
B) −$141
C) $583
D) $912
E) −$482

Question

Quizplus · Accepted Answer

The correct answer is A because the company is currently operating at full capacity and sales are projected to increase by 7 percent next year. This means that the company will need to increase its assets, costs, and current liabilities by 7 percent in order to meet the increased demand. The company's current liabilities are proportional to sales, so they will increase by 7 percent to $3,135. The company's assets and costs are also proportional to sales, so they will increase by 7 percent to $20,945 and $16,745, respectively. The company's long-term debt and equity are not proportional to sales, so they will remain the same at $7,600 and $10,760, respectively. The company's net income is also proportional to sales, so it will increase by 7 percent to $3,763. The company's dividend payout ratio is 50 percent, so it will pay out $1,882 in dividends. The company's external financing needs are calculated as follows: External financing needs = Increase in assets + Increase in costs + Increase in current liabilities - Increase in net income - Dividends paid External financing needs = $2,243 + $1,540 + $195 - $246 - $1,882 External financing needs = -$596

Nu Tek Has Sales of $19,700, Net Income of $3,517