How much additional external capital will be required for next year if sales increase 15%?
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Mansfield Corporation had 2007 sales of $100 million. The balance sheet items that vary directly with sales and the profit margin are as follows:
Cash 5%
Accounts Receivable 15%
Inventory 20%
Net Fixed Assets 40%
Accounts payable 15%
Accruals 10%
Profit Margin after taxes 10%
The dividend payout rate is 50 percent of earnings, and the balance in retained earnings at the end of 2007 was $33 million. Notes payable are currently $7 million. Long term bonds and common stock are constant at $5 million and $10 million.
a. How much additional external capital will be required for next year if sales increase 15%? (assume the company is already operating at full capacity)
b. What will happen to external fund requirements if Mansfield Corporation reduces the payout ratio, grows at a slower rate, or suffers a decline in its profits margin? Discuss each of these separately.
c. Prepare a pro forma balance sheet for 2008 assuming that any external funds being acquired will be in the form of notes payable. Disregard the information in part b in answering this question (that is use the original information and part a in constructing your pro forma balance sheet).
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The solution discusses how much additional external capital will be required for next year if sales increase 15%.
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Part (A)
Increase in sales = 15%*100=15 million
Increase in Cash - 5%*15=0.75
Increase in Act/Rec - 15%*15=2.25
Increase in Inventory - 20%*15=3.00
Increase in Net fixed assets - 40%*15=6.00
Total Increase in Assets = 12.00
Increase in Act/Pay - 15%*15=2.25
Increase in Accruals - 10%*15=1.50
Increase in current liabilities = 3.75
Net requirement of ...
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