The most recent financial statements for Retro Machine, Inc., follow. Sales for 2010 are projected to grow by 20 percent. Interest expense will remain constant; the tax rate and the dividend payout rate will also remain constant. Costs, other expenses, current assets, fixed assets, and accounts payable increase spontaneously with sales. The tax rate is 35 percent.
RETRO MACHINE INC
2009 Income Statement
Sales $ 937,000
Costs 716,000
Other expenses 18,000
Earnings before interest and taxes $ 203,000
Interest paid 12,000
Taxable income $ 191,000
Taxes (35%) 66,850
Net income $ 124,150
Dividends $ 37,245
Addition to retained earnings 86,905
RETRO MACHINE, INC
Balance Sheet as of December 31, 2009
ASSETS LIABILITIES AND OWNERS’ EQUITY
Current assets Current liabilities
Cash $ 25,800 Accounts payable $ 67,800
Accounts receivable 41,300 Notes payable 15,500
Inventory 87,900 Total $ 83,300
Total $ 155,000 Long-term debt $ 151,000
Owners’ equity
Fixed assets Common stock and paid-in surplus $ 126,000
Net plant and equipment $ 431,000 Accumulated retained earnings 225,700
Total $ 351,700
Total assets $ 586,000 Total liabilities and owners’ equity $ 586,000
Required:
If the firm is operating at full capacity and no new debt or equity are issued, what is the external financing needed to support the 20 percent growth rate in sales? (Do not include the dollar sign ($). Negative amount should be indicated by a minus sign.)
External financing needed $
To calculate the external financing needed to support a 20 percent growth rate in sales for Retro Machine, Inc., we need to determine the increase in assets and liabilities that will occur as a result of the sales growth.
1. Calculate the increase in fixed assets:
Current fixed assets = Net plant and equipment = $431,000
Fixed assets increase spontaneously with sales, so the increase in fixed assets will be 20% of the current fixed assets:
Increase in fixed assets = 20% * $431,000 = $86,200
2. Calculate the increase in current assets:
The current assets (excluding cash) increase spontaneously with sales, so the increase in current assets will be 20% of the current assets (excluding cash):
Increase in current assets = 20% * ($41,300 + $87,900) = $25,440
3. Calculate the increase in accounts payable:
Accounts payable also increase spontaneously with sales, so the increase in accounts payable will be 20% of the current accounts payable:
Increase in accounts payable = 20% * $67,800 = $13,560
4. Calculate the increase in notes payable:
There is no information given about the relationship between notes payable and sales, so we assume no change.
5. Calculate the external financing needed:
External financing needed = Increase in fixed assets + Increase in current assets + Increase in accounts payable + Increase in notes payable
External financing needed = $86,200 + $25,440 + $13,560 + $0 = $125,200
Therefore, the external financing needed to support the 20 percent growth rate in sales for Retro Machine, Inc. is $125,200.