Using the data in the chapter, estimate Walgreen’s external financing needs if a 20-percent growth rate is expected.
1. Forecast the dollar amount of the expected sales increase:
2. Determine the dollar amount of new asset investment necessary to support the sales increase.
3. Compute the expected amount of retained profits from forecast sales.
4. Find the amount of spontaneous increases expected in accounts payable and accrued liabilities from the forecasted change in sales.
5. Subtract the expected amount of retained profits and spontaneous increase in current liabilities from the new asset investment. The remaining dollar amount is the external financing needed.
6. If fixed assets are not expected to change with the sales increase, the only assets that changes with sales are the current assets. In this case, current assets will be expected to rise 0.172 x $14,327 = $2,464. With an expected increase in retained earnings of $2,235 and spontaneous current liability financing of $1,619, the firm’s the external financing needs (EFN) will be $(1,390); that is, they will have a surplus of funds.