Additional Funds Needed

Exercise 1
M2M has current assets of P800,000 and noncurrent assets of P1,500,000. The firm expects its sales to
increase by 25 percent next year from its current level of P3,500,000. M2M's current liability is accounts
payable of P1,000,000. If both current assets and current liabilities will increase proportionately with
sales, what additional financing will be needed by M2M next year? Assume M2M has a net profit margin
of 5 percent. An increase in noncurrent assets of P600,000 will be required. The firm pays out 40 percent
of its earnings as dividends.

800,000 - Current Assets

*Tumaad ung fixed assets and current assets

Dividend Payout
RR = 1- DPO
0.60 = 1 - 0.40

AFN = Projected increase in assets – spontaneous increase in liabilities – increase in retained

earnings
= (P600,000 + P800,000(0.25)) (*times muna) – (P1,000,000(0.25)) – (P3,500,000 (1.25)(0.05)(0.6))
= P800,000 – P250,000 – P131,250
= P418,750

AFN
- Long Term Liability (Bonds, Long Term Liability, PN)
- Equity (PS,CS)

Exercise 2
Petra paid P20,000 in dividends last year and expects to increase dividends 10 percent this year. The firm
will need additional financing of P50,000 to finance the expected growth. Petra started the year with
P30,000 in accounts payable; P30,000 in notes payable; P10,000 in accrued taxes and P100,000 in
long-term debt. The company is operating at full capacity. Calculate Petra's total assets if the firm expects
sales to grow 20 percent this year and the earnings after tax will be P72,000.
50,000 = (A/S)(0.20S) - (P40,000/S)(0.20S) - (P72,000 - P22,000)
P50,000 = 0.20A – P8,000 – P50,000
-0.20A = -P108,000

A = P540,000

Exercise 3
The Petra Company is considering a P40 million expansion (capital expenditure) * lalabas na outflow *
program next year. The company wants to determine approximately how much additional financing will
be needed if the expansion program is undertaken. Next year the company expects to earn P30 million
*inflow* after interest and taxes. The company also plans to increase its dividends from P10 million
*outflow* to P12 million. *outflow* If the expansion program is accepted, the company expects working
capital requirements to increase by approximately P10 million next year. Long-term debt retirement
obligations total P3 million *out flow* next year and depreciation is expected to be P13 million. *inflow*
No fixed assets are expected to be sold next year.

Answer
 Additional Funds Needed
Capital expenditure P40,000,000
Net income (30,000,000)
Dividends to be paid 7,000,000
Working capital requirement 10.000,000
Debt retirement 3,000,000
Depreciation expense (13,000,000)
Financing needed 12,000,000

Exercise 4
Cherubin, a manufacturer of plastic containers, was not able to maximize its full potential due to a new
law that affects the use of plastics. Due to constraints faced by Cherubin, it only operated at 75% of its
full capacity. At the end of the year, Cherubin was able to generate P75,000,000 in sales. Its fixed assets
amounts to P25,000,000.

Required: Compute for the following:

a. Level of sales if it had been operating at full capacity?

Full capacity sales = P75,000,000/0.75

= P100,000,000

b. Target fixed assets to Sales ratio

Target FA/S ratio = P25,000,000/P100,000,000
= 25.0%

c. How large increase in fixed assets will Cherubin needs to meet its target fixed assets to sales
ratio if it sales increased by 20%?

S1= P75,000,000 ×1.20 = P90,000,000

No increase in FA up to P100,000,000.
ΔFA = 0.25 ×(P90,000,000 – P100,000,000)
= -10,000,000

*if 40%

S1 = 75,000,000 X 1.4 = 105,000,000

ΔFA = 0.25 ×(P105,000,000 – P100,000,000)

= 1,250,000

Exercise 5
Spartan Company is a merchandising company involve in selling furniture. Spartan Company provided
the following information for the year 2020:

Sales P3,000,000
Total assets 2,250,000
Accounts payable 300,000
Notes payable 250,000
Accrued wages 100,000
 Additional Funds Needed
Accrued taxes 50,000

For 2021, Spartan Company estimated that its assets must increase by P0.80 for every P1.00 increase
in sales. Spartan’s profit margin is 6%, and its retention ratio is 50%. How large of a sales increase
can the company achieve without having to raise funds externally?

AFN = (A0*/S0)ΔS – (L0*/S0)ΔS – MS1(RR) - Retention Ratio

P0 = (0.80)ΔS – (450,000/3,000,000)ΔS – (0.06)(S1)(0.50)
= 0.80ΔS – 0.15ΔS – 0.03S1
= 0.65ΔS – 0.03S1
= 0.65(S1– S0) – 0.03S1
= 0.65(S1– P3,000,000) – 0.03S1
= 0.65S1– P1,950,000 – 0.03S1)
-0.62S1= -P1,950,000
S1= P3,145,161.29

Increase in sales without additional funds needed = P3,145,161.29 – P3,000,000

= P145,161.29

Exercise 6
In 2020, Brownie Company's sales were P15.0 million. Its balance sheet at year end 2020 is shown below.
Brownie's 2021 sales are expected to be P20 million and its 2022 sales are expected to be P25 million.
The profit margin is forecasted to be at 5.0% of sales, and with annual dividends of P200,000 for 2021
and 2022. The company operated at 90% of its full capacity. As a result, assume that the net fixed asset
figure on the balance sheet will remain constant for both 2021 and 2022. Assuming that the ratios of
assets (except fixed assets, net) to sales and accounts payable to sales in 2020 remain the same in 2021
and 2022, calculate the total amount, i.e., one number, of external financing required during the 2 year
period from 2021 through 2022.

Brownie Co. Balance Sheet

(December 31, 2020)
(P millions)
Current assets: Current liabilities:
Cash P1.5 Accts. payable P1.0
Accts. Rec. 2.0 Accrued wages 0.5
Inventory 2.5 Long-term debt 4.0
Fixed assets, net 2.0 Stockholders' equity 2.5
P8.0 P8.0

Assets that are expected to vary proportionately with sales

= P8.0 - P2.0
= P6.0 million

External financing needed (EFN)

= [(P6/P15)(P10) - (P1.50/P15)(P10)] - [0.05(P20 + P25) - 2(P0.20)] - Dividends
= P4M - P1M – P1.85M
= P1.15M
 Additional Funds Needed
Exercise 7
At year-end 2008, total assets for Ambrose Inc. were P1.2 million and accounts payable were
P375,000. Sales, which in 2008 were P2.5 million, are expected to increase by 25% in 2009.
Total assets and accounts payable are proportional to sales, and that relationship will be
maintained; that is, they will grow at the same rate as sales. Ambrose typically uses no current
liabilities other than accounts payable. Common stock amounted to P425,000 in 2008, and
retained earnings were P295,000. Ambrose plans to sell new common stock in the amount of
P75,000. The firm’s profit margin on sales is 6%; 60% of earnings will be retained.

a. What was Ambrose’s total debt in 2008?

TOTAL LIABILITIES AND EQUITY

Accounts payable + Long-term debt + Common stock + Retained earnings

P1,200,000 = P375,000 + Long-term debt + P425,000 + P295,000

Long-term debt= P105,000.

Total debt = Accounts payable + Long-term debt

= P375,000 + P105,000 = P480,000.

Alternatively,
Total debt = Total liabilities and equity – Common stock – Retained earnings
= P1,200,000 – P425,000 – P295,000 = P480,000.

b. How much new long-term debt financing will be needed in 2009? (Hint: AFN – New stock =
New long-term debt.)

Assets/Sales (A0*/S0) = P1,200,000/P2,500,000 = 48%.

L0*/Sales (L0*/S0) = P375,000/P2,500,000 = 15%.

2009 Sales = (1.25)(P2,500,000) = P3,125,000.

ΔS = P3,125,000 – P2,500,000 = P625,000.
AFN= (A0*/S0)(ΔS) – (L0*/S0)(ΔS) – MS1(RR) – New common stock
= (0.48)(P625,000) – (0.15)(P625,000) – (0.06)(P3,125,000)(0.6) – P75,000
= P300,000 – P93,750 – P112,500 – P75,000 = P18,750