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Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977

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BuyFindarrow_forward

Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977
Textbook Problem

SALES INCREASE Pierce Furnishings generated $2 million in sales during 2015, and its year-end total assets were $1 5 million. Also, at year-end 2015, current liabilities were $500,000, consisting of $200,000 of notes payable, $200,000 of accounts payable, and $100,000 of accrued liabilities. Looking ahead to 2016, the company estimates that its assets must increase by $0 75 for every $1 00 increase in sales. Pierce’s profit margin is 5%, and its retention ratio is 40%. How large of a sales increase can the company achieve without having to raise funds externally?

Summary Introduction

To Determine: The increase in sales.

Introduction: AFN is abbreviated as additional funds needed, is the measure of cash an organization must raise from outer sources to back the expansion in assets necessary to help expanded level of sales. It is additionally called as external financing needed (EFN).

Explanation

Determine the change in sales

AFN=[(A0*S0)×ΔS(L0*S0)×ΔS(M×S1×RR)]$0=[(0.75)×ΔS($300,000$2,000,000)×ΔS(5%×S1×40%)]$0=[(0.75×ΔS)(0.15×ΔS)(0.02×S1)]$0=[(0.60×ΔS)(0.02×S1)]

$0=[(0.60×(S1S0))(0.02×S1)]$0=[(0.60×(S1$2,000,000))(0

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