Suppose that Psy Ops Industries currently has the balance sheet shown below, and
ID: 2784110 • Letter: S
Question
Suppose that Psy Ops Industries currently has the balance sheet shown below, and that sales for the year just ended were $5.7 million. The firm also has a profit margin of 20 percent, a retention ratio of 25 percent, and expects sales of $8.7 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.)
Suppose that Psy Ops Industries currently has the balance sheet shown below, and that sales for the year just ended were $5.7 million. The firm also has a profit margin of 20 percent, a retention ratio of 25 percent, and expects sales of $8.7 million next year.
Explanation / Answer
In this case, the necessary increase in assets will be based on only Current Assets
Increase in Assets = Current Assets/ Sales * Increased Sales
Increase in Assets = 2,679,000/ 5,700,000 * (8,700,000 - 5,700,000)
Increase in Assets = 1,410,000
The spontaneous increase in liabilities will be:
Increase in Liabilities = 2,109,000/ 5,700,000 * (8,700,000 - 5,700,000)
Increase in Liabilities = 1,110,000
The projected increase in retained earnings will be:
Projected increase in retained earnings = 8,700,000 * 0.25 * 0.2
Projected increase in retained earnings = 435,000
AFN = 1,410,000 - 1,110,000 - 435,000
AFN = -135,000