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Jill has just invented a non-slip wig for men which she expects will cause sales to double from $10,000 to 20,000, increasing net income to $1,000. She feels that she can handle the increase without adding any fixed assets. (1) Will Jill need any outside capital if she pays no dividends? (2) If so, how much?

Jill's Wigs Inc. had the following balance sheet last year:

Cash $800 Accounts Payable $350
Accounts receivable 450 Accrued wages 150
Inventory 950 Notes Payable 2000
Net fixed Assets 34000 Mortgage 26500
Common Stock 3200
Total Assets $36,200 Retained Earnings 4000
Total Liabilities
and equity $36,200

Jill has just invented a non-slip wig for men which she expects will cause sales to double from $10,000 to 20,000, increasing net income to $1,000. She feels that she can handle the increase without adding any fixed assets. (1) Will Jill need any outside capital if she pays no dividends? (2) If so, how much?

a. No; zero
b. yes; $7700
c. yes; 1700
d. yes; 700
e; no; there will be a 700.00 surplus

Solution Preview

Since there is no need to increase the fixed assets the capital needed will be for meeting the working capital increase.

Current assets: 800+450+950=2200
As the sales are doubling from 10,000 to 20000, the current assets will also double.
Increase in current assets =2200

Spontaneous Current ...

Solution Summary

Discussion coaches you through the computations. No references.

$2.19