Business, 15.02.2020 02:56 marquez8

The Steel Mill is currently operating at 84 percent of capacity. Annual sales are $28,400 and net income is $2,250. The firm has current liabilities of $2,700, long-term debt of $9,800, net fixed assets of $16,900, net working capital of $5,000, and owners' equity of $12,100. All costs and net working capital vary directly with sales. The tax rate and profit margin will remain constant. The dividend payout ratio is constant at 40 percent. How much additional debt is required if no new equity is raised and sales are projected to increase by 12 percent?

Answers: 2

Show answers

Answers

Answer from: jennifer9983

The additional debt required is $1610.4

Explanation:

Since there is no new equity being raised, the additional financing required to sustain business operations would be done by taking on higher debt. To calculate how much debt would be required, we need to use a formula that gives us the amount of External Financing Needs.

The formula is simple to use and requires us to factor in the following variables.

The increase in assets required with respect to the change in salesThe increase in liabilities required with respect to the change in salesThe increase in unappropriated profit (retained earnings) required

The formula to calculate the first point is given by dividing last year's assets with last year's sales and multiplying it by the change in sales.

The formula to calculate the second point is by dividing last year's liabilities by last year's sales and multiplying it by the change in sales.

The formula to calculate the third point is multiplying the profit margin by the forecasted sales and the dividend payout ratio.

Lets look at all the values for the required variables below:

Total Assets last Year : $24,600Total Sales Last Year : $28,400Total Current Liabilities last year: $2,700 Profit Margin : 8%Forecasted Sales: $31,808Dividend Payout Ratio: 40%Change in Sales : $3,408Current Liabilities: $2,700 (we will not use total liabilities. Since long term debt does not vary with change in sales, we will exclude long term debt)

We know the values to points 2, 3, 6, and 8 since these are given in the equation. We will calculate the rest of the values required below.

(1) Total Assets last year: Total Equity + Long Term Debt + Current Liabilities. Therefore, Assets = 12,100+2,700+9,800 = 24,600

(4) Profit Margin = Net Income/Sales = 2,250/28,400 = 8%

(5) Forecasted Sales = Sales last year x Increase in Sales = $28,400 x 1.12 = $31,808

(7) Change in sales = Forecasted Sales - Last Year Sales = 3,408

Formula for External Financing Need:

(Assets/Sales x Change in sales) - (Liabilities/Sales x Change in Sales) - (Profit Margin x Forecasted Sales x Dividend Payout Ratio)

Now, lets plug in the values:

(24,600/28,400 x 3,408) - (2,700/28,400 x 3,408) - (8% x 31,808 x 40%)

2,952 - 324 - 1,017.86 = 1,610.14

So, additional debt required is $1,610.14

Answer from: Quest

answer; i believe the correct answer is (a) motion for change of venue;

Answer from: Quest

i am asked a question by the teacher.

a question is asked by the teacher.

Other questions on the subject: Business

Business, 21.06.2019 22:30, makaalbarnthemeister

Owning a word is a characteristic of a powerful a. productb. servicec. organization d. brand

Answers: 2

continue

Business, 22.06.2019 18:00, lovecats12

Rosie and her brother michael decided recently to purchase an rv together. they both want to use the rv to take their families camping. the price of the rv was $10,000. since michael expects to use the rv 60% of the time and rosie 40% of the time, michael contributed $6,000 and rosie contributed $4,000. their ownership percentage equals their contribution percentage. which type of property titling should they use to reflect their ownership interest?

Answers: 1

continue

Business, 22.06.2019 19:20, natajayd

The following information is from the 2019 records of albert book shop: accounts receivable, december 31, 2019 $ 42 comma 000 (debit) allowance for bad debts, december 31, 2019 prior to adjustment 2 comma 000 (debit) net credit sales for 2019 179 comma 000 accounts written off as uncollectible during 2017 15 comma 000 cash sales during 2019 28 comma 500 bad debts expense is estimated by the method. management estimates that $ 5 comma 300 of accounts receivable will be uncollectible. calculate the amount of bad debts expense for 2019.

Answers: 2

continue

Business, 22.06.2019 22:00, ednalovegod

He interest rate effect is the change in real gdp caused by the federal reserve adjusting target interest rates. is the change in consumer and investment spending due to changes in interest rates resulting from changes in the aggregate price level. is the change in exports and imports, resulting from changes in the interest rate caused by changes in the aggregate price level. is the change in investment spending and government purchases caused by changes in money demand. is the change in interest rates, caused by changes to government purchases.

Answers: 2

continue

You know the right answer?

The Steel Mill is currently operating at 84 percent of capacity. Annual sales are $28,400 and net in...