Answer:
Consider the following calculations
Explanation:
Current Sales Level = $ 5000000 and Expected Sales Growth Rate = 20 %
Next Year Sales = 5000000 x 1.2 = $ 6000000
Expected Profit Margin = 8% and Expected Profit = 0.08 x 6000000 = $ 480000
Expected Dividend Payout = $ 200000
Increase in Retained Earnings = Expected Profit - Expected Dividend Payout = 480000 - 200000 = $ 280000
An increase in retained earnings such as the aforementioned unbalances the asset, liability, equity equation and hence, some of the asset-liability items need to change so as to rebalance the equation. The items that usually change are the current assets, fixed assets, and current liabilities except for the current portion of the firm's long-term debt as the same is a function of the firm's financing activities, whereas increment in the sale and consequent increment in other balance sheet items are operating activities.
Further, it is assumed that the current assets and current liabilities less notes payable (it is a short-term financing instrument and hence remains unchanged) all increase at the same rate as sales increment. Fixed Assets although increase to support higher sales level, but are part of the firm's investing activities and hence do not bear a direct proportional relationship with the increase in sales.
Change in Current Asset = (1.08 x 1000000) - 1000000 = $ 80000
Change in Fixed Assets = 300000 (already mentioned)
Change in Current Liabilities less Notes Payable = (750000 - 300000) x 1.08 - (750000 - 300000) = $ 36000
Therefore, Additional Financing Required = Change in Current Assets + Change in Fixed Assets - Change in Current Liabilities less Notes Payable - Increment in Retained Earnings = 80000 + 300000 - 36000 - 280000 = $ 64000
