See below the 2006 balance sheet for Marbell Inc.
Assets Liabilities & Stockholders' Equity
Cash $15,000 Accts Payable $90,000
Accts. Rec. 90,000 Notes Payable 30,000
Inventory 60,000 Accrued expenses 7,500
Current Assets 165,000 Current Liabilities 127,500
Fixed assets 60,000 Common Stock 75,000
Retained earnings 22,500
Total Liabilities + S.E. Equity $225,000
Sales for 2006 were $300,000. Sales for 2007 have been projected to increase by 20%.
Assuming that Marbell Inc. is operating below capacity, calculate the amount of new funds required to finance this growth. Marbell has an 8% return on sales and 70% is paid out as dividends. Show all work and explain.
Percent of Sales Table
Cash Accts. Payable
Accts. Rec. Accrued expenses
Current assets Current Liabilities
New Sales Level =
New funds required =
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The solution explains how to determine the new funds needed
Oats 'R' Us: growth rate, debt equity ratio, full capacity, external financing
Growing Pains - External Financing
Case 4 Growing Pains
"We must plan for the future," said Vicky. "I think we've been
playing it by ear for too long." Mason immediately called the treasurer,
Jim Moroney. "Jim, I need to know how much additional funding we are
going to need for the next year," said Mason. "The growth rate of
revenues should be between 25% and 40%. I would really appreciate if
you can have the forecast on my desk by early next week."
Jim knew that his fishing plans for the weekend had better be put
aside since it was going to be a long and busy weekend for him. He
immediately asked the accounting department to give him the last three
years' financial statements (see Tables 1 and 2) and got right to work!
I attached the financial statements.
Need to see and understand each calculation and show all work
2. If Oats 'R' Us is operating its fixed assets at full capacity,
what growth rate can it support without the need for any
additional external financing?
3. Oats 'R' Us has a flexible credit line with the Midway Bank.
If Mason decides to keep the debt-equity ratio constant, up to
what rate of growth in revenue can the firm support? What
assumptions are necessary when calculating this rate of
growth? Are these assumptions realistic in the case of Oats
'R' Us? Please explain.
4. Initially Jim assumes that the firm is operating at full
capacity. How much additional financing will it need to
support revenue growth rates ranging from 25% to 40% per
5. After conducting an interview with the production manager,
Jim realizes that Oats 'R' Us is operating its plant at 90%
capacity, how much additional financing will it need to
support growth rates ranging from 25% to 40%?
6. What are some actions that Mason can take in order to
alleviate some of the need for external financing? Analyze
the feasibility and implications of each suggested action.
7. How critical is the financial condition of Oats 'R' Us? Is
Vicky justified in being concerned about the need for
financial planning? Explain why.
8. Given that Mason prefers not to deviate from the firm's 2004
debt-equity ratio, what will the firm's pro-forma income
statement and balance sheet look like under the scenario of
40% growth in revenue for 2005 (ignore feedback effects).