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The Danville Company is considering a $50 million expansion (capital expenditure) program next...

Question:

The Danville Company is considering a $50 million expansion (capital expenditure) program next year. The company wants to determine approximately how much additional financing will be needed if the expansion program is undertaken. Next year the company expects to earn $25 million after interest and taxes. The company also plans to increase its dividends from $5 million to $7 million. If the expansion program is accepted, the company expects working capital requirements to increase by approximately $8 million next year. Long-term debt retirement obligations total $3 million next year and depreciation is expected to be $13 million. No fixed assets are expected to be sold next year.

a. $30 million

b. $43 million

c. $32 million

d. $22 million

Liability:

Liabilities refer to the monetary commitments of the business which arise due to the borrowings from any source to fulfil the long or short term financial needs. It is recorded in the balance sheet that consists of non-current liability and current liability.

Answer and Explanation:

The correct option is a. $30 million

Particular Amount
Capital expenditure $50 million
Less: Earn after interest and taxes ($25 million)
Add: Dividends $7 million
Add: Working capital $8 million
Add: Long-term debt $3 million
Less: Depreciation ($13 million)
Additional financing needed $30 million

Learn more about this topic:

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Sources of Long-Term Financing

from Business 100: Intro to Business

Chapter 23 / Lesson 4
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