How might the firm reduce its reliance on external funds

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Reference no: EM132000622

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?

Reference no: EM132000622

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