Summit Inc. Just completed its best year ever. Sales for 2004 were $5.5 million. Its year-end balance sheet is shown below.
|
Balance Sheet for 2004
|
|
Current assets
|
$1,000,000
|
Current Liabilities
|
$500,000
|
|
Net fixed assets
|
2,000,000
|
Long-term debt
|
1,500,000
|
|
|
Owners' equity
|
$1,000,000
|
|
Total
|
$3,000,000
|
|
$3,000,000
|
|
Income Statement for 2004
|
|
Sales
|
$5,500,000
|
|
Cost of goods sold
|
3,500,000
|
|
Gross Profit
|
$2,000,000
|
|
Operating Expenses
|
1,000,000
|
|
Interest
|
170,000
|
|
Taxes
|
350,200
|
|
Net Profit
|
$479,800
|
|
Dividends
|
$400,000
|
Summit's financial manager would like to forecast the dollar amount of external financing the firm will need in 2005. The financial manager assumes that sales will increase 30 percent and that since the firm is operating at capacity, total assets will stay in the same proportion to sales in 2005 as in 2004. In addition, all current liabilities are assumed to be spontaneous.
a. Forecast the dollar amount of external funds needed in 2005.
b. How might the firm reduce its reliance on external funds?