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Chapter 2: 3BP_b (page 114)

Galehouse Gas Stations Inc. expects sales to increase from \(1,550,000 to \)1,750,000 next year. Galehouse believes that net assets (Assets - Liabilities) will represent 50 percent of sales. His firm has an 8 percent return on sales and pays 45 percent of profits out as dividends.

b. If the dividend payout is only 25 percent, what effect will this growth have

on funds?

Short Answer

Expert verified

The growth in the funds of the company is $12,000.

Step by step solution

01

Expected Profit earned

Profitearned=Expectedsales-Currentsales×Rateofreturn=$1,750,000-$1,550,000×8%=$16,000

02

Dividend amount

Dividendamount=Profitearned×Dividendpayoutratio=$16,000×25%=$4,000

03

Growth in the funds

Growthinfunds=Profitearned-Dividendamount=$16,000-$4,000=$12,000

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Most popular questions from this chapter

Stilley Corporation had earnings after taxes of \(436,000 in 20X2 with 200,000 shares outstanding. The stock price was \)42.00. In 20X3, earnings after taxes declined to \(206,000 with the same 200,000 shares outstanding. The stock price declined to \)27.80.

a. Compute earnings per share and the P/E ratio for 20X2.

b. Compute earnings per share and the P/E ratio for 20X3.

c. Give a general explanation of why the P/E changed. You might want to

consult the text to explain this surprising result.

Explain how depreciation generates actual cash flows for the company.

A-Rod Fishing Supplies had sales of \(2,500,000 and cost of goods sold of \)1,710,000. Selling and administrative expenses represented 10 percent of sales. Depreciation was 6 percent of the total assets of $4,680,000. What was the firm’s operating profit?

Identify whether each of the following items increases or decreases cash flow:

Increase in accounts receivable

Decrease in prepaid expenses

Increase in notes payable

Increase in inventory

Depreciation expense

Dividend payment

Increase in investment

Increase in accrued expenses

Decrease in account payable

In January 2007, the Status Quo Company was formed. Total assets were \(544,000, of which \)306,000 consisted of depreciable fixed assets. Status

Quo uses straight-line depreciation of \(30,600 per year, and in 2007 it estimated its fixed assets to have useful lives of 10 years. Aftertax income has been \)29,000 per year each of the last 10 years. Other assets have not changed since 2007.

c. Now assume income increased by 10 percent each year. What effect would this have on your preceding answers? (A comment is all that is necessary.)
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