The Landis Corporation had 2008 sales of $100 million. The balance sheet items that vary directly with sales and the profit margin are as follows:

Cash, 5%. Accounts receivable, 15. Inventory, 25. Net fixed assets, 40. Accounts payable, 15. Accruals, 10. Profit margin after taxes, 6%.
The dividend payout rate is 50 percent of earnings, and the balance in retained earnings at the end of 2008 was $33 million and $5 million, respectively. Notes payable are currently $12 million.
a) How much additional external capital will be required for next year if sales increase 15 percent? (Assume the company is already operating at full capacity)

To determine the additional external capital required for the next year, we need to calculate the increase in various balance sheet items that are directly linked to sales.

1. Calculate the increase in sales:
Current sales = $100 million
Increase in sales = 15% of $100 million = $15 million
New sales = Current sales + Increase in sales = $100 million + $15 million = $115 million

2. Calculate the increase in balance sheet items:
a) Cash: 5% of new sales = 5% of $115 million = $5.75 million
b) Accounts receivable: 15% of new sales = 15% of $115 million = $17.25 million
c) Inventory: 25% of new sales = 25% of $115 million = $28.75 million
d) Accounts payable: 15% of new sales = 15% of $115 million = $17.25 million
e) Accruals: 10% of new sales = 10% of $115 million = $11.5 million

3. Calculate the change in net fixed assets:
Since the company is already operating at full capacity, there will be no change in net fixed assets.

4. Calculate the change in retained earnings:
Current retained earnings = $33 million
Profit margin after taxes = 6%
Dividend payout rate = 50% of earnings
Retained earnings after dividends = Current retained earnings - (Profit margin x Current sales x (1 - Dividend payout rate))
Retained earnings after dividends = $33 million - (0.06 x $100 million x (1 - 0.5)) = $21 million
Change in retained earnings = Retained earnings after dividends - $5 million = $21 million - $5 million = $16 million

5. Calculate the additional external capital required:
Additional external capital required = Change in current liabilities + Change in retained earnings + Change in net fixed assets
Current liabilities = Notes payable = $12 million
Change in current liabilities = Accounts payable + Accruals - Notes payable
Change in current liabilities = $17.25 million + $11.5 million - $12 million = $16.75 million

Additional external capital required = $16.75 million + $16 million + $0 (no change in net fixed assets) = $32.75 million.

Therefore, the Landis Corporation will require an additional external capital of $32.75 million for the next year if sales increase by 15 percent.