Firm X Has the Following Balance Sheet:
​ $\text { Balance Sheet as of } 12 / 31 / \mathrm{XX}$

question 27

Essay

Firm X has the following balance sheet:
​ $\text { Balance Sheet as of } 12 / 31 / \mathrm{XX}$
$\begin{array}{lrlr}\text { Assets }&&\text { Liabilities and Equity }\\\hline\text { Cash } & \$ 3,500 &\text { Accounts payable } & \$ 14,500 \\\text { Marketable securities } & 3,000&\text { Bank loans } & 35,000 \\\text { Accounts receivable } & 27,000&\text { Bonds } & 21,500 \\\text { Inventory } & 31,000&\text { Common stock } & 10,000 \\\text { Plant \& equipment } & 77,000&\text { Retained earnings } & 60,500\\&\$141,500&&\$141,500\end{array}$
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Sales are currently $100,000 and management expects them to rise by 20 percent to $120,000. The profit margin on sales is 10 percent and the firm distributes 30 percent of its earnings as cash dividends.​
a. How much external finance will be required by the expansion according to the percent of sales technique?
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b. If the firm needs external finance, the funds should be acquired by issuing long-term debt. If the firm has excess funds, they should be held in marketable securities. If the firm needs funds, management may also draw upon the firm's holdings of marketable securities. Construct a new projected balance sheet for the anticipated level of sales assuming that management does not increase the firm's holdings of cash.​

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Definitions:

Cash Flows

The movement of money into and out of a business or project, considered as a measure of its financial health.

Financial Break-even Point

The level of revenue necessary to cover all operating and financial costs, including interest and principal payments, yielding a net income of zero.

Discounted Payback Period

The amount of time it takes for an investment to generate enough cash flows to recover the initial outlay, with the cash flows discounted to account for the time value of money.

Forecasting Risk

The potential deviation of outcomes from predicted results in financial projections, due to uncertainties in the market or inaccurate assumptions.