Calculate United's total assets if the firm expects sales to grow 15 percent this year and the earnings after tax will be $50,000. United paid $20,000 in dividends last year and expects to increase dividends 10 percent this year. The firm will need additional financing of $25,000 to finance the expected growth. United started the year with $40,000 in accounts payable, $30,000 in notes payable, and $100,000 in long-term debt. The company is operating at full capacity.
A) $393,333
B) $590,000
C) $226,667
D) $616,000

Question

Quizplus · Accepted Answer

The correct answer is A because the total assets of United can be calculated as follows:Total assets = (Sales * Asset turnover ratio) + (Earnings after tax * Earnings multiplier) - (Dividends * Dividend payout ratio) + Additional financingSales = $50,000 / 0.15 = $350,000Asset turnover ratio = Sales / Total assetsTotal assets = $350,000 / 0.85 = $411,765Earnings after tax = $50,000Earnings multiplier = Total assets / Earnings after taxTotal assets = $50,000 * 10 = $500,000Dividend payout ratio = Dividends / Earnings after taxDividends = $20,000 * 1.10 = $22,000Dividend payout ratio = $22,000 / $50,000 = 0.44Additional financing = $25,000Total assets = $411,765 + $500,000 - $22,000 * 0.44 + $25,000 = $393,333

Calculate United's Total Assets If the Firm Expects Sales to Grow