Great Subs believes it can increase sales by 50% without any increase in net fixed assets. Earnings after tax are expected to be $2,000. The company pays no dividends. What additional financing will Subs need to finance this growth? Subs' balance sheet currently is as follows:
A) $3,350 surplus -- no additional financing needed
B) $1,650
C) $3,650
D) None of the above are correct.

Question

Great Subs believes it can increase sales by 50% without any increase in net fixed assets. Earnings after tax are expected to be $2,000. The company pays no dividends. What additional financing will Subs need to finance this growth? Subs' balance sheet currently is as follows: 
A) $3,350 surplus -- no additional financing needed 
B) $1,650 
C) $3,650 
D) None of the above are correct.

Quizplus · Accepted Answer

Solution:
AFN = (12,900/S)(.5S) - ($5,600/S)(.5S) - $2,000
= 6,450 - 2,800 - 2,000 = $1,650

Great Subs Believes It Can Increase Sales by 50% Without