Urban's, which is currently operating at full capacity, has sales of $47,000, current assets of $5,100, current liabilities of $6,200, net fixed assets of $51,500, and a profit margin of 5 percent. 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 3 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?

AE = Increase in Assets - Increase in Liabilities - Profit * (1 - payout ratio)

= [ ($51,500 + $5,100) * 0.03 - ($6,200) * 0.03 - ($47,000*1.03*0.05) * (1-0) ]

= - $908.50

Here, it can be clearly denoted that the firm does not need to raise the additional equity.

Explanation:

Given:

Sales = $47,000

Current assets = $5,100

Current liabilities = $6,200

Net fixed assets = $51,500

Profit margin = 5 %

Sales are expected to increase by 3 percent next year

∴

The additional equity financing (AE) can be computed as follow:

AE = Increase in Assets - Increase in Liabilities - Profit * (1 - payout ratio)

= [ ($51,500 + $5,100) * 0.03 - ($6,200) * 0.03 - ($47,000*1.03*0.05) * (1-0) ]

= - $908.50

Here, it can be clearly denoted that the firm does not need to raise the additional equity.