In 1998, Hepler Company's sales were $26 million and its total assets were $10 Current liabilities were $4 million and total equity was $2 million. Hepler Company's sales for 1999 are forecasted to be $34 million, earnings after taxes are expected to be 5 percent of sales and dividends of $800,000 are expected to be paid. Assuming that the ratios "assets to sales" and "current liabilities to sales" in 1998 remain the same in 1999, determine the amount of additional financing required.

Question

Business

Raelynn Armstrong

18 May, 15:38

In 1998, Hepler Company's sales were $26 million and its total assets were $10 Current liabilities were $4 million and total equity was $2 million. Hepler Company's sales for 1999 are forecasted to be $34 million, earnings after taxes are expected to be 5 percent of sales and dividends of $800,000 are expected to be paid. Assuming that the ratios "assets to sales" and "current liabilities to sales" in 1998 remain the same in 1999, determine the amount of additional financing required.

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Phoebe Clay · Answer 1

AFN $946,154

Explanation:

To forecast the additional funds needed it's necessary to apply the following equation:

AFN = A0 + S1/S0 - L0 x S1/S0 - S1 x PM x b

Where:

A0 = Current Level of Assets

S1/S0 = Percentage Increase in sales

L0 = Current Level of Liabilities

S1 = New Level of Sales

PM = Profit Margin

b = Retention rate = 1 - payout rate

Final Value

AFN = A0 (10,000,000) + S1/S0 (0,31) - L0 (4,000,000)

x S1/S0 (0,31) - S1 (34,000,000) x PM (0,05) x b (0,53) = $946,154

We need to calculate some values as Earning After Taxes:

5% of Sales = 5% x $34,000,000 = $1,700,000

Payout RATIO = Dividends/Net Income = $800,000/$1,700,000 = 47%

Retention Ratio = 0,53