In the Industrial Supply Company example (Table 4.4) it was assumed that the com
ID: 2625444 • Letter: I
Question
In the Industrial Supply Company example (Table 4.4) it was assumed that the company;s fixed assets were being used at nearly full capacity and that net fixed assets would have to increase proportionately as sales increased. Alternatively, suppose that the company has excess fixed assets and that no increase in net fixed assets is required as sales are increased. Assume that the company plans to maintain its dividend payments at the same level in 2011 as in 2010. Determine the amount of additional financing needed for 2011 under each of the following conditions:
Increase Sales Increase in expenses
a.$3,750,000 $3,750,000
b.$3,000,000 $2,800,000
c.$4,500,000 $4,000,000
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Explanation / Answer
Question: Balance Sheet (Actual) December 31, 2010 (Pro Forma) December 31, 2011 Comments Assets Cash $500,000 $625,000 25% increase (assumption) Accounts Receivable 2,000,000 2,500,000 25% increase (assumption) Inventories 4,000,000 5,000,000 25% increase (assumption) Total Current Assets $6,500,000 $8,125,000 Fixed assets, net $1,000,000 $1, 250,000 25% increase (assumption) Total assets (A) $7,500,000 $9,375,000 Liabilities and Equity Accounts payable (CL) $1,500,000 $1,875,000 25% increase (assumption) Notes payable 1,000,000 1,750,000 {1,000,000+AFN=$1,000,000+$750,000 Total current liabilities $2,500,000 $3,625,000 Long-term debt 500,000 500,000 No change (assumption) Stockholder