Suppose that Psy Ops Industries currently has the balance sheet shown below, and
ID: 2782415 • Letter: S
Question
Suppose that Psy Ops Industries currently has the balance sheet shown below, and that sales for the year just ended were $5.5 million. The firm also has a profit margin of 30 percent, a retention ratio of 20 percent, and expects sales of $8.5 million next year.
If fixed assets have enough capacity to cover the increase in sales and all other assets and current liabilities are expected to increase with sales, what amount of additional funds will Psy Ops need from external sources to fund the expected growth? (Enter your answer in dollars not in millions. Negative amount should be indicated by a minus sign.)
Assets Liabilities and Equity Current assets $ 2,475,000 Current liabilities $ 1,925,000 Fixed assets 4,250,000 Long-term debt 1,750,000 Equity 3,050,000 Total assets $ 6,725,000 Total liabilities and equity $ 6,725,000Explanation / Answer
Increase in sales = $8.5 million - $5.5 million = $3 million
Increase in current assets = Current assets * Increase in sales/Current sales = $2,475,000*$3 million/$5.5 million = $1,350,000
Increase in current liabilities = Current liabilities * Increase in sales/Current sales = $1,925,000*$3 million/$5.5 million = $1,050,000
Since, there is enough capacity in fixed assets to cover the increase in sales, there will not be any increase in fixed assets.
Expected net income for next year = Expected sales*Net profit margin = $8.5 million * 30% = $2,550,00
Increase in retained earnings = Expected net income*Retention ratio = $2,550,000*20% = $510,000
External funds needed = Increase in current assets - Increase in current liabilities - Increase in retained earnings
External funds needed = $1,350,000 - $1,050,000-$510,000 = -$210,000