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20 November, 12:32

Urban's, which is currently operating at full capacity, has sales of $47,000, current assets of $5,100, current liabilities of $6,200, net fixed assets of $51,500, and a profit margin of 5 percent. The firm has no long-term debt and does not plan on acquiring any. The firm does not pay any dividends. Sales are expected to increase by 3 percent next year. If all assets, short-term liabilities, and costs vary directly with sales, how much additional equity financing is required for next year?

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  1. 20 November, 12:53
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    AE = Increase in Assets - Increase in Liabilities - Profit * (1 - payout ratio)

    = [ ($51,500 + $5,100) * 0.03 - ($6,200) * 0.03 - ($47,000*1.03*0.05) * (1-0) ]

    = - $908.50

    Here, it can be clearly denoted that the firm does not need to raise the additional equity.

    Explanation:

    Given:

    Sales = $47,000

    Current assets = $5,100

    Current liabilities = $6,200

    Net fixed assets = $51,500

    Profit margin = 5 %

    Sales are expected to increase by 3 percent next year



    The additional equity financing (AE) can be computed as follow:

    AE = Increase in Assets - Increase in Liabilities - Profit * (1 - payout ratio)

    = [ ($51,500 + $5,100) * 0.03 - ($6,200) * 0.03 - ($47,000*1.03*0.05) * (1-0) ]

    = - $908.50

    Here, it can be clearly denoted that the firm does not need to raise the additional equity.
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