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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.