Suppose That Wave Industries Currently Has the Balance Sheet Shown

question 29

Multiple Choice

Suppose that Wave Industries currently has the balance sheet shown as follows, and that sales for the year just ended were $25 million. The firm also has a profit margin of 10 percent, a retention ratio of 20 percent, and expects sales of $27 million next year. If fixed assets have enough capacity to cover the increase in sales and all other assets and current liabilities are expected to increase with sales, what amount of additional funds will the company need from external sources to fund the expected growth?
$$\begin{array} { l r r l r } \text { Assets } && { \text { Liabilities ard Equity } } \\\text { Current Assets } & \$ 6,500,000 & \text { Current Liabilities } & \$ 4,000,000 \\\text { Fixed Assets } & 13,000,000 & \text { Long-tem Debt } & { 6,500,000 } \\& & \text { Equity } & 9,000,000 \\\text { Total Assets } & \$ 19,500,000 & \text { Total Liabilities and Equity } & \$ 19,500,000\end{array}$$

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Definitions:

Partnership

A bona fide business arrangement that includes two or more individuals managing together and sharing earnings.

Joint Venture

A joint undertaking by two or more persons or business entities to combine their efforts or their property for a single transaction or project, or for a related series of transactions or projects. A joint venture is generally treated like a partnership for tax and other legal purposes.

Co-Venturers

Parties that collaborate on a specific business venture, sharing profits, losses, and control.

Dissociates

Refers to the separation or detachment of something from something else, often used in chemistry to describe how molecules split into smaller parts or ions.