Respuesta :
Answer: Owen's Electronics will need $9.375 million to finance a 25% growth in sales.
We use the following formula to determine the quantum of External Financing Needed (EFN) to fuel additional growth, since the company is functioning at full capacity.
[tex]\mathbf{EFN = \frac{A^{*}_{0}}{S_{0}}(S_{1} - S_{0}) - \frac{L^{*}_{0}}{S_{0}}(S_{1} - S_{0}) - (NPM)(S_{1})(b)}[/tex]
where
[tex]S_{0}[/tex] is current sales
[tex]S_{1}[/tex] is projected increase in sales
[tex]{A^{*}_{0}[/tex] refers to Assets that vary directly with sales at time 0.
[tex]L^{*}_{0}[/tex] refers only to those liabilities that change directly with sales
NPM refers to the after tax (net) profit margin
b refers to retention ratio. This is also calculated as [tex]b = 1 - Dividend Payout Ratio[/tex]
We have:
Last year's sales $100 million
Projected Growth rate in sales 25%
Next Year's Sales [tex]100*1.25 = 125 million[/tex]
Total Assets $121 million
Current Liabilities $52 million
We take only Current liabilities into account as the question states that all current liabilities vary with sales
Net Profit Margin 9%
Dividend Payout Ratio 30%
Retention Ratio [tex]0.70 (1-0.3)[/tex]
Substituting the values in the formula above we get,
[tex]\mathbf{EFN = \frac{121}{100}(125 - 100) - \frac{52}{100}(125 - 100) - (0.09)(125)(0.70)}[/tex]
[tex]\mathbf{EFN = 1.21(25) - 0.52(25) - (0.09)(125)(0.70)}[/tex]
[tex]EFN = 30.25 - 13 - 7.875[/tex]
[tex]\mathbf{EFN = 9.375}[/tex]