Mansfield Corporation had 20X1 sales of $100 million. The balance sheet items that vary directly with sales and the profit margin are as follows: cash 5%, accounts receivable 15%, inventory 20%, net fixed assets 40%, accounts payable 15%, accruals 10%, and profit margin after taxes 10%. The dividend payout rate is 50 percent of earnings, and the balance in retained earnings at the end of 20X1 was $33 million. Notes payable are currently $7 million. Long-term bonds and common stock are constant at $5 million and $10 million, respectively.
a. How much additional external capital will be required for the next year if sales increase 15 percent? (Assume that the company is already operating at full capacity.)
b. What will happen to external fund requirements if Mansfield Corporation reduces the payout ratio, grows at a slower rate, or suffers a decline in its profit margin? Discuss each of these separately.
c. How do I place the information into a pro forma balance sheet for 20X2 assuming that any external funds being acquired will be in the form of notes payable. Disregard the information in part b in answering this question (that is, use the original information and part a in constructing your pro forma balance sheet).