Wagner Industrial Motors, which is currently operating at full capacity, has sales of $2,460, current assets of $800, current liabilities of $490, net fixed assets of $1,650, and a 5 percent profit margin. The firm has no long-term debt and does not plan on acquiring any. The firm does not pay any dividends. Sales are expected to increase by 10 percent next year. If all assets, short-term liabilities, and costs vary directly with sales, how much additional equity financing is required for next y

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Question:

Wagner Industrial Motors, which is currently operating at full capacity, has sales of $2,460, current assets of $800, current liabilities of $490, net fixed assets of $1,650, and a 5 percent profit margin. The firm has no long-term debt and does not plan on acquiring any. The firm does not pay any dividends. Sales are expected to increase by 10 percent next year. If all assets, short-term liabilities, and costs vary directly with sales, how much additional equity financing is required for next year

Answer:$60.70Explanation:Calculation to determine how much additional equity financing is required for next yearFirst step is to calculate the Current total equity Using this formulaCurrent total equity= Total assets - Total liabilitiesLet plug in the formulaCurrent total equity = $1,650 + $800 - $490 Current total equity= $1,960Second step is to calculate the Projected assets using this formulaProjected assets = Total assets * Projected increase in assets Let plug in the formulaProjected assets =($1650 + $800 ) * (1 +10%) Projected assets = $2,695Third step is to calculate the Projected liabilities using this formulaProjected liabilities = Current liabilities * Projected increase in liabilitiesLet plug in the formulaProjected liabilities = $490 * (1 + 10%) Projected liabilities= $539Fourth step is to calculate the Projected increase in retained earnings Using this formulaProjected increase in retained earnings = Projected sales * Profit margin * Retention ratio Let plug in the formulaProjected increase in retained earnings = ($2,460 * 110%) * 5% * 100% Projected increase in retained earnings = $135.30Now let calculate the Additional Equity funding needed using this formulaAdditional Equity funding needed = Increase in assets - Increase in current liabilities - Current equity - Increase in retained earningsLet plug in the formulaAdditional Equity funding needed = $2,695 - $539 - $1,960 - $135.30 Additional Equity funding needed= $60.70Therefore the additional equity financing that is required for next year will be $60.70

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