A firm has the following balance sheet:
Cash:$ 20
Accounts payable:$ 20
Accounts receivable:20
Notes payable:40
Inventory:20
Long-term debt:80
Fixed assets:180
Common stock:80
Retained earnings:20
Total assets:$240
Total liabilities and equity:$240
Sales for the year just ended were $400,and fixed assets were used at 80 percent of capacity,but its current assets were at optimal levels.Sales are expected to grow by 5 percent next year,the profit margin is 5 percent,and the dividend payout ratio is 60 percent.How much additional funds (AFN)will be needed?
A) $4.6
B) −$6.4 (Surplus)
C) $2.4
D) −$4.6 (Surplus)
E) $0.8

Question

Quizplus · Accepted Answer

The firm will have a surplus of $6.4 million. The firm's net income is $20 million (5% profit margin on $400 million sales). The firm will pay out $12 million in dividends (60% payout ratio on $20 million net income). The firm will need to retain $8 million ($20 million net income - $12 million dividends). The firm's assets will increase by $8 million (retained earnings of $8 million). The firm's liabilities will not change. Therefore, the firm will have a surplus of $6.4 million ($8 million increase in assets - $1.6 million increase in liabilities).

A Firm Has the Following Balance Sheet