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Management Advisory Services MAS11

EXTERNAL FINANCING NEEDED

Problem 1 (EFN, concept). JELLENIE Corp uses the external financing needed as a plug item. It has a new
capital budget of P2 000 000, a profit of P3 000 000 and a payout ratio of 60%,
1. How much should be raised in external funds?

Problem 2 (EFN, concept). ARLEIGH Enterprise’ balance sheet as of December 31, 2014 is as follows:

Current assets P 600 000 Accounts payable P 100 000


Accruals 100 000
Notes payable 100 000
Long-term liabilities 300 000
Fixed assets 400 000 Equity 400 000
P 1 000 000 P 1 000 000

In 2014, the company reported sales of P5 000 000, net income of P100 000, and dividends of P60 000.
Sales are projected to increase by 20% next year. Both profit margin and the dividend pay-out ratio will
remain the same. Operations are at full capacity. Assume external funds will be raised through issuance of
long-term debt.
1. How much long-term debt will the company have to issue next year?
2. If the operations are not at full capacity, what will be your answer?

Problem 3 (Fixed assets capacity). DHARREN Inc.’s balance sheet for last year is as follows:

Cash P 10 000 Accounts payable P 15 000


AR 25 000 Notes payable 20 000
Inventories 40 000 Accrued expenses 15 000
Debt 30 000
Net Fixed assets 75 000 Equity 70 000
Total assets P 150 000 Total Liab & Equity P 150 000

Sales last year were P100 000. It is expected to grow 50% during this year. Last year, fixed assets were
operating only at 85% capacity. Profit margin will remain constant this year at 5%, 60% of the earnings
are declared as dividends.
1. What is the level of sales if the company is operating at full capacity?
2. What is the EFN?

Problem 4 (Maximum growth rate without EFN). GLADYS has the following ratios: Ao/So= 1.6; Lo/So = 0.4;
profit margin =0.1; plowback or retention ratio = 0.55. Last year, Sales were P100 000.
a. Assuming all assets and liabilities are spontaneous, at what growth rate can GLADYS achieve
without external funding?