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Additional Funding Needed Analysis

The firm projects an increase in sales and costs, leading to a total funding need of 39,280 while maintaining a constant debt-equity ratio of 0.5435. The equity portion required is approximately 25,447, which is well covered by available retained earnings of 95,732. Consequently, the firm can fully fund its additional financing needs without requiring external financing, utilizing 25,447 in equity and 13,833 in debt.

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Sunil Sharma
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8 views2 pages

Additional Funding Needed Analysis

The firm projects an increase in sales and costs, leading to a total funding need of 39,280 while maintaining a constant debt-equity ratio of 0.5435. The equity portion required is approximately 25,447, which is well covered by available retained earnings of 95,732. Consequently, the firm can fully fund its additional financing needs without requiring external financing, utilizing 25,447 in equity and 13,833 in debt.

Uploaded by

Sunil Sharma
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© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd

Question 13

. In problem #12 above, suppose the firm wishes to keep its debt-equity ratio
constant. What is Additional Funding Needed/EFN now?

Projected sales = 929,000 × 1.20 = 1,114,800


Projected costs = 723,000 × 1.20 = 867,600
Projected other expenses = 19,000 × 1.20 = 22,800
EBIT = 1,114,800 − 867,600 − 22,800 = 224,400
Interest = 14,000 (constant)
EBT = 210,400
Taxes = 210,400 × 0.35 = 73,640
Net income = 210,400 − 73,640 = 136,760
Dividend payout = 33,736 ÷ 112,450 = 0.3
Retention ratio = 0.7
Retained earnings = 136,760 × 0.7 = 95,732
Current assets = 25,300 + 40,700 + 35,900 = 101,900
Projected current assets = 101,900 × 1.20 = 122,280
Fixed assets (at full capacity) = 413,000 × 1.20 = 495,600
Total projected assets = 122,280 + 495,600 = 617,880
Accounts payable = 68,000 × 1.20 = 81,600
Notes payable = 17,000 (constant)
Current liabilities = 81,600 + 17,000 = 98,600
Retained earnings = 182,000 + 95,732 = 277,732
Equity = 140,000 + 277,732 = 417,732
Original debt = 17,000 (notes) + 158,000 (long-term) = 175,000
Original equity = 322,000
Debt-equity ratio = 175,000 ÷ 322,000 = 0.5435
Increase in total assets = 617,880 − 565,000 = 52,880
Spontaneous liabilities increase = 81,600 − 68,000 = 13,600
Funds needed after spontaneous liabilities:
52,880 − 13,600 = 39,280
Now we split this required financing between debt and equity at the existing D/E
ratio.
Let total funding be X, and since D/E = 0.5435,
Then:
Debt = 0.5435 × Equity
and Equity = X − Debt
So:
Debt = 0.5435 × (X − Debt)
Debt + 0.5435 × Debt = 0.5435 × X
Debt × (1 + 0.5435) = 0.5435 × X
Debt = 0.5435X ÷ 1.5435 ≈ 0.3522X
Equity = X − Debt = X − 0.3522X = 0.6478X
Only retained earnings can fund the equity portion.
So,
Equity Need = 0.6478 × 39,280 ≈ 25,447
Available retained earnings = 95,732
Since 95,732 > 25,447, we have plenty of equity financing available.
In that case, full 39,280 AFN can be funded using 25,447 equity and 13,833
debt,
and NO external financing from outside the firm is needed

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