Appalachian Register, Inc. (ARI) has current sales of $50 million. Sales are expected to grow to $75 Million next year. ARI currently has accounts receivable of $10 million, inventories of $15 million and net fixed assets of $20 million. These assets are expected to grow at the same rate as sales over the next year Accounts payable are expected to increase from their current level of $10 million t a new level of $13 million next year. ARI wants to increase its cash balance at the end of next year by $2 million over its current bash balances, which average $4 million. Net income next year is forecasted to be $10 million. Next year, ARI plans to pay dividents of $1 million, up from $500,00 this year. ARI marginal tax rate is 34 percent. How much external financing does ARI require next year?

Question

Appalachian Register, Inc. (ARI) has current sales of $50 million. Sales are expected to grow to $75 Million next year. ARI currently has accounts receivable of $10 million, inventories of $15 million and net fixed assets of $20 million. These assets are expected to grow at the same rate as sales over the next year Accounts payable are expected to increase from their current level of $10 million t a new level of $13 million next year. ARI wants to increase its cash balance at the end of next year by $2 million over its current bash balances, which average $4 million. Net income next year is forecasted to be $10 million. Next year, ARI plans to pay dividents of $1 million, up from $500,00 this year. ARI marginal tax rate is 34 percent. How much external financing does ARI require next year?

Answer 1

To calculate the amount of external financing required by ARI next year, we need to determine the changes in each asset and liability account and compute the resulting net financing needed.

Let's break down the information given and calculate each component:

1. Sales Increase: The sales are expected to grow from $50 million to $75 million, resulting in an increase of $25 million.

2. Accounts Receivable (AR): AR is currently $10 million and is expected to increase at the same rate as sales. Therefore, the increase in AR will be $25 million.

3. Inventories: Inventories are currently $15 million and are expected to grow at the same rate as sales. Therefore, the increase in inventories will be $25 million.

4. Net Fixed Assets (NFA): NFA is currently $20 million and, like AR and inventories, is expected to grow at the same rate as sales. Thus, the increase in NFA will also be $25 million.

5. Accounts Payable (AP): AP is currently $10 million and is expected to increase to $13 million next year. Therefore, the increase in AP will be $3 million.

6. Desired Cash Balance: ARI wants to increase its cash balance at the end of next year by $2 million over its current average cash balance of $4 million. Therefore, the increase in cash will be $2 million.

7. Net Income: Net income next year is forecasted to be $10 million.

8. Dividends: Dividends are expected to increase from $500,000 this year to $1 million next year. Therefore, the increase in dividends will be $500,000.

9. Marginal Tax Rate: The marginal tax rate for ARI is 34%.

Now, let's calculate the external financing required by ARI next year using the following formula:

External Financing = (AR + Inventories + NFA + Desired Cash Balance - AP - Net Income + Dividends) × (1 - Marginal Tax Rate)

External Financing = ($25m + $25m + $25m + $2m - $3m - $10m + $1m) × (1 - 0.34)
External Financing = $60m × 0.66
External Financing = $39.6 million

Therefore, ARI requires $39.6 million of external financing next year.