Suppose that Wave Industries currently has the balance sheet shown as follows, and that sales for the year just ended were $25 million. The firm also has a profit margin of 10 percent, a retention ratio of 20 percent, and expects sales of $27 million next year. If fixed assets have enough capacity to cover the increase in sales and all other assets and current liabilities are expected to increase with sales, what amount of additional funds will the company need from external sources to fund the expected growth?

Asset Liabilities and Equity

Current Assets $6,500,000 Current Liabilities $4,000,000

Fixed Assets $13,000,000 Long-term Debt $6,500,000

Equity $9,000,000

Total Assets $19,500,000 Total Liabilities and Equity $19,500,000