17.07.2022 - 20:49

# Suppose Super Fun Toys Inc., has sales of $8.9 million for the year just ended, the profit margin of the firm is 16% with a retention rate of 28%, and the firm expects sales of$9.8 million next year. If all assets and current liabilities are expected to

Question:

Suppose Super Fun Toys Inc., has sales of $8.9 million for the year just ended, the profit margin of the firm is 16% with a retention rate of 28%, and the firm expects sales of$9.8 million next year. If all assets and current liabilities are expected to grow with sales, what amount of additional funds will Super Fun Toys Inc. need from external sources to fund the expected growth?

Assets Liabilities and Equity
Current Assets $3,500,000 Current liabilities$2,400,000
Fixed Assets $5,100,000 Long-term debt$2,100,000
Equity $4,500,000 Total assets$8,600,000 Total liabilities and equity $8,600,000 Answers (1) • April 2, 2023 в 15:06 Super Fun Toys Inc. will need to raise$535,000 from external sources to fund the expected growth. This can be calculated using the sustainable growth rate formula: Sustainable Growth Rate = Profit Margin x Retention Rate Sustainable Growth Rate = 16% x 28% Sustainable Growth Rate = 4.48% This means that Super Fun Toys Inc. can grow their sales by 4.48% using only their retained earnings. To achieve the expected sales of $9.8 million, they would need to raise additional funds from external sources. The additional funds needed can be calculated using the following formula: Additional Funds Needed = (Assets/Sales) x (Expected Sales - Current Sales) Additional Funds Needed = (($8,600,000/$8,900,000) x ($9,800,000 - $8,900,000)) Additional Funds Needed = ($0.966 x $900,000) Additional Funds Needed =$869,400 However, since all assets and current liabilities are expected to grow with sales, the calculation should be adjusted to reflect this. Thus: New Assets = (Assets/Sales) x Expected Sales New Assets = ($8,600,000/$8,900,000) x $9,800,000 New Assets =$9,504,494 New Current Liabilities = (Current Liabilities/Sales) x Expected Sales New Current Liabilities = ($2,400,000/$8,900,000) x $9,800,000 New Current Liabilities =$2,643,581 Adjusted Additional Funds Needed = New Assets - (Current Liabilities + Equity) Adjusted Additional Funds Needed = $9,504,494 - ($2,643,581 + $4,500,000) Adjusted Additional Funds Needed =$2,360,913 Therefore, Super Fun Toys Inc. will need to raise $2,360,913 from external sources to fund the expected growth, which is$1,491,513 more than the initial calculation.
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