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DanielleCPA
DanielleCPA, Certified Public Accountant (CPA)
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Tulley Appliances Inc. projects next years sales to be $20

Resolved Question:

Tulley Appliances Inc. projects next year's sales to be

$20 million, Current sales are $15 minion, based on current assets of $5 million and fixed assets of

$5 million. The firrn's net profit margin is 5 percent after taxes. Tulley forecasts that its current assets

will rise in direct proportion to the increase in sales, but that its fixed assets will increase by only

$100,000. Currently, Tulley has $1.5 million in accounts payable (which vary directly with sales),

$2 million in long-term debt (due in 10 years), and common equity (including $4 million in retained

earnings) totaling $6.5 million. Tulley plans to pay $500,000 in common stock dividends next year.

a. What are Tulley's total financing needs (i.e., total assets) for the coming year?

h. Given the firm's projections and dividend payments plans, what are its discretionary financingneeds?

c. Based on your projections, and assuming that the $100,000 expansion in fixed assets will

occur, what is the largest increase in sales the firm Call support without having to resort to

the use of discretionary sources of financing?
Submitted: 5 years ago.
Category: Finance
Expert:  DanielleCPA replied 5 years ago.

Hi and welcome to Just Answer! I'm happy to help answer your Finance questions. Feel free to ask for clarification if needed.

Discretionary financing = Projected Total Assets - Projected Total Liabilities - Projected Equity

The percent increase in sales is 1/3 (approximately 33%). Both current assets and current

liabilities increase in direct proportion to sales.

Current Assets: 5,000,000 * 4/3 = 6,666,667

Current Liabilities: 1,500,000 * 4/3 = 2,000,000

To project fixed assets, we first need to determine current year fixed assets.

In the current year, total liabilities + total equity = 10,000,000.

This is A/P of 1.5M + LTD of 2M + Equity of 6.5M = 10M

We know current assets are 5M so fixed assets must also be 5M for balance sheet to balance.

A 100,000 increase to 5M is 5,100,000.

Total Assets for Next Year are Projected at 11,766,667

We must next project retained earnings.

Multiply the 5% Net profit margin by sales

20,000,000 * 5% = 1,000,000

Projected Retained Earnings= Current Retained Earnings + Net Profit - Dividends

4,000,000 + 1,000,000 - 500,000 = 4,500,000

Long-term debt and common stock will remain the same.

Projected liabilities + equity = 11M

This is A/P of 2M + LTD of 2M + Stock of 2.5M + RE of 4.5M

So discretionary financing is:

11,766,667 - 11,000,000 = 766,667

C. The highest sales can be without needing discretionary financing is 15,818,180

It is calculated as follows. In this problem, x is the percent increase in sales.

5,000,000x + 5,100,000 = 1,500,000x +2,000,000 +2,500,000 + 4,000,000 - 5,000,000 + 750,000x

5,000,000x -1,500,000x - 750,000x = 2,000,000 +2,500,000 +4,000,000 - 500,000 - 5,100,000

2,750,000x = 2,900,000

x=1.054

15,000,000 * 1.054 = 15,818,180

Note that 1.054 is a repeating fraction so if you multiply by 1.054 exact you don't get the above answer, but

this is the right answer because you need to use the full fraction.

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