Chapter 2: 1CP_a (page 122)

Mansfield Corporation had 20X1 sales of $100 million. The balance sheet items that vary directly with sales and the profit margin are as follows:
Percent
Cash
5%
Accounts receivable
15
Inventory
20
Net fixed assets
40
Accounts payable
15
Accruals
10
Profit margin after tax
10%
The dividend payout rate is 50 percent of earnings, and the balance in retained earnings at the end of 20X1 was $33 million. Notes payable are currently $7 million. Long-term bonds and common stock are constant at $5 million and $10 million, respectively.
a. How much additional external capital will be required for next year if sales
increase 15 percent? (Assume that the company is already operating at full
capacity.)

Short Answer

Expert verified

The additional external capital required by the company amounts to $2.50 million.

Step by step solution

Change in sales

$\begin{array}{rcl} Change in sales & = & Existing sales \times Growth ratio \\ = & $ 100 million \times 15 % \\ = & $ 15 million \end{array}$

Assets to sales ratio

$\begin{array}{rcl} Assets to sales ratio & = & Cash + Accounts receivables + Inventory + Net fixed assets \\ = & 5 % + 15 % + 20 % + 40 % \\ = & 80 % \end{array}$

Liabilities to sales ratio

$\begin{array}{rcl} Liabilities to sales ratio & = & Accounts payable + Accruals \\ = & 15 % + 10 % \\ = & 25 % \end{array}$

New sales level

$\begin{array}{rcl} New sales level & = & Existing sales + Increase in sales \\ = & $ 100 million + $ 15 million \\ = & $ 115 million \end{array}$

Required new funds

$\begin{array}{rcl} Required new funds & = & (Assets to sales ratio \times Change in sales) - (Liabilities to sales ratio \times Chnage in sales) - (Profit margin \times New sales level) (1 - Dividend payout ratio) \\ = & (0.80 \times $ 15 million) - (0.25 \times $ 15 million) - (0.10 \times $ 115 million) (1 - 0.50) \\ = & $ 12 million - $ 3.75 million - $ 6.75 million \\ = & $ 2.50 million \end{array}$

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Times mirror and glass company
Sales	\(126,000
Less: Cost of goods sold	93,000
Gross profit	\)33,000
Less: selling and administrative expenses	11,000
Lease Expenses	4,000
Operating profit*	\(18,000
Less: Interest expenses	3,000
Earning before taxes	\)15,000
Less: Taxes (30%)	4,500
Earning after taxes	$10,500

Short Answer

Step by step solution

Change in sales

Assets to sales ratio

Liabilities to sales ratio

New sales level

Required new funds

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	Percent
Cash	5%
Accounts receivable	15
Inventory	20
Net fixed assets	40
Accounts payable	15
Accruals	10
Profit margin after tax	10%