With sales of $350,000, MJM, Inc. is operating at capacity but management anticipates that sales will grow 25 percent during the coming year. The company earns 10 percent on sales and distributes 50 percent of earnings to stockholders. Its current balance sheet is as follows:
a. In addition to cash, which assets and liabilities will increase with the increase in sales and by how much if the percent of sales is used to forecast the increases?
b. How much external finance will the firm need?
c. If cash did not increase but could be maintained at $7,500, what impact would the lower cash have on the firm’s need for external finance?
d. If the firm distributed 25 percent instead of 50 percent of its earnings, would it need external finance?
e. Construct a new balance sheet assuming that cash increases with the increase in sales and the firm distributes 50 percent of its earnings to stockholders. If the firm needs external finance, acquire the funds by issuing a short-term note to a commercial bank. Compare this financing strategy to the strategies implied by the answers to parts c and d.

  • CreatedMarch 19, 2015
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