100 points Problem 427 Percentofsales method ILO43 Owens Ele

100 points Problem 4-27 Percent-of-sales method ILO4-3 Owen\'s Electronics has nine operating plants in seven southwestern states. Sales for last year were $100 mition, and the batance sheet at year end is similar in percentage of sales to hat of previous years (and te w continue n the future) A. assets including bed assets) and curent liabates w-vary drectly with sales The hm lS worka g at capacity Balance Sheet and S 7 Accounts S 20 25 Accrued wages 28 Accrued taxes Current assets Fixed assets S 105 $105 Total Total assets Owen\'s has an aftertax profit margin of 10 percent and a dividend payout ratio of 45 percent If sales grow by 20 percent next year, determine how many dolars of new unds are needed to finance the growth. (D0 not round intermediate calculations. Enter your answer in dollars, not millions, (e.g.. $1,234,567))

Solution

Previous Year:

Sales, S0 = $100,000,000
Assets, A0 = $105,000,000
Spontaneous Liabilities, L0 = Current Liabilities
Spontaneous Liabilities, L0 = $40,000,000
Profit margin, P = 10%
Dividend Payout Ratio, D = 45%

Current Year:

Growth rate = 20%

Sales = S0 * (1 + g)
Sales = $100,000,000 * 1.20
Sales = $120,000,000

Net Income = Sales * Profit Margin
Net Income = $120,000,000 * 10%
Net Income = $12,000,000

Addition to Retained Earnings = Net Income * (1 - D)
Addition to Retained Earnings = $12,000,000 * (1 - 0.45)
Addition to Retained Earnings = $6,600,000

Increase in Assets = A0 * g
Increase in Assets = $105,000,000 * 20%
Increase in Assets = $21,000,000

Increase in Spontaneous Liabilities = L0 * g
Increase in Spontaneous Liabilities = $40,000,000 * 20%
Increase in Spontaneous Liabilities = $8,000,000

Additional Fund Needed = Increase in Assets - Addition to Retained Earnings - Increase in Spontaneous Liabilities
Additional Fund Needed = $21,000,000 - $6,600,000 - $8,000,000
Additional Fund Needed = $6,400,000