RRM, Inc. has the following balance sheet:
Sales are currently $160,000, but management expects sales to rise to $200,000. The net profit margin is expected to be 10 percent, and the firm distributes 60 percent of its earnings as dividends.
Management is concerned about the firm’s need for external funding to cover the expansion in assets required by the expansion in sales.
To achieve sales of $200,000, management will have to expand plant by $10,000 and expects to increase its holdings of cash by $1,000. However, the holding of marketable securities may be reduced to zero.
a. According to the percent of sales and the additional information, will the firm need external financing, and, if so, how much?
b. Construct a pro forma balance sheet indicating the forecasted new entries for sales of $200,000. If the firm has excess funds, they should be invested in marketable securities. If the firm needs funds, these should be covered by issuing new long-term debt.

  • CreatedMarch 19, 2015
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