Company A forecasts that sales next year will be $5,600. If I assume long-term debt remains constant, what is the value for external funds needed (EFN)? I have the financial statement in for below:
Cost of sales
Tax (35%) $5,000
Dividends $ 325
Net fixed assets $ 850
3,275 Current liabilities
Long term debt
Equity $ 320
Total $4,125 $4,125
As an extension, If I assume that Company A has sufficient excess capacity to support a sales level of $5,300 with no new fixed assets, what would my EFN for projected sales of $5,600 be?
Continuing the previous problem, Company A believes that an industry slowdown is possible over the next year. In this case, sales growth will be 4%. What is the EFN?
EFN = Increase in assets - Increase in current liabilities (spontaneous) - Increase in retained earnings
Assets and current liabilities are supposed to increase in the same percentage as sales.
Percentage increase in sales is (5,600-5,000)/5,000 = 12%
Total assets = 4,125
Increase in assets = 4,125X12% = 495
Increase in current liabilities = 320X12% = 38.40
Current net income percentage = 325/5,000 = 6.5%
Payout ratio = ...
The solution explains how to determine the amount of external funding needed (EFN).