Charles-Baker, International, Inc. expects sales to increase to $36 million next
ID: 2728636 • Letter: C
Question
Charles-Baker, International, Inc. expects sales to increase to $36 million next year from $27 million this year. Its current assets are $9.0 million, accounts payable is $2.7 million, fixed assets are $9.0 million, long-term debt is $3.6 million, owners’ equity is $11.0 million, and the earnings after tax-to-sales ratio is 5 percent. Current assets and accounts payable can be assumed to increase in the same proportion as sales. Other current liabilities are expected to stay at the same level. Net fixed assets will increase by $1.0 million and the firm plans to pay $800,000 as dividends. a. What are Charles-Baker, International, Inc.’s total financing needs for next year? b. How much money would the firm have to borrow to finance its needs?
a. What are Charles-Baker, International, Inc.’s total financing needs for next year?
b. How much money would the firm have to borrow to finance its needs?
Explanation / Answer
a) Total financing needs = Change in assets - Change in Liabilities - Additions to retained earnings
i) Change in assets = Change in current assets + Change in net fixed assets
= 9 Million * 33.33 %(NOTE 1) + 1 Million
= 3 + 1 = 4 Million
(NOTE 1) :- (36 - 27) / 27 * 100 = 33.33 %
ii) Change in liabilities = Change in accounts payable = 2.7 Million * 33.33 % = 0.90 Million
iii) Additions to reatined earnings =
Earnings after tax for next year = 36 Million * 5 % = 1.8 Million
Additions to retained earnings = Earnings after tax - Dividend = 1.8 - 0.8 = 1 Million
Thus, Total financing needs = 4 - 0.90 - 1 = 2.1 Million [ $ 2100000]
Conclusion:- Total financing needs for next year = $ 2100000 [ 2.1 Million ]
b) Assuming owners' equity of $ 11 Million in last year remained same also in next year, thus, there is nothing to borrow any money to finance the needs by the firm as the owner's equity is sufficient to meet the financing needs of the firm.