Chapter 3: 4BP (page 184)

Antivirus Inc. expects its sales next year to be $2,500,000. Inventory and accounts receivable will increase $480,000 to accommodate this sales level. The company has a steady profit margin of 15 percent with a 35 percent dividend payout. How much external financing will the firm have to seek? Assume there is no increase in liabilities other than that which will occur with the external financing

Short Answer

Expert verified

The external financing that the company has to seek is $236,250.

Step by step solution

Information given in the question

The following information is provided:

Expected sales = $2,500,000

Expected increase in inventory and accounts receivables = $480,000

Profit margin = 15%

Dividend pay-out = 35%

Net income calculation

The net income is $375,000.

$N e t i n c o m e = E x p e c t e d s a l e s \times P r o f i t m a r g i n s = $ 2, 500, 000 \times 15 % = $ 375, 000$

Dividend pay-out calculation

The dividend pay-out is $131,250.

$D i v i d e n d p a y o u t = N e t i n c o m e \times D i v i d e n d p a y o u t p e r c e n t a g e = $ 375, 000 \times 35 % = $ 131, 250$

Addition made to retained earnings

The addition to retained earnings is $243,750.

$A d d i t i o n t o r e t a i n e d e a r n i n g s = N e t i n c o m e - D i v i d e n d p a y o u t = $ 375, 000 - $ 131, 250 = $ 243, 750$

External funds needed

The external fund needed is $236,250.

$E x t e r n a l f u n d s n e e d e d = I n c r e a s e i n a s s e t s - A d d i t i o n t o r e t a i n e d e a r n i n g s = $ 480, 000 - $ 243, 750 = $ 236, 250$

Unlock Step-by-Step Solutions & Ace Your Exams!

Full Textbook Solutions
Get detailed explanations and key concepts
Unlimited Al creation
Al flashcards, explanations, exams and more...
Ads-free access
To over 500 millions flashcards
Money-back guarantee
We refund you if you fail your exam.

Start your free trial

Over 30 million students worldwide already upgrade their learning with Vaia!

Recommended explanations on Business Studies Textbooks

View all explanations

What do you think about this solution?

We value your feedback to improve our textbook solutions.

October	1,250
November	2,250
December	4,500
January	3,500
Total units	11,500

January	\(28,000
February	\)19,000
March	\(12,000
April	\)14,000
May	\(8,000
June	\)6,000
July	\(22,000
August	\)26,000
September	\(29,000
October	\)34,000
November	\(42,000
December	\)24,000
Total annual sales	\(264,000

January	\(28,000
February	\)19,000
March	\(12,000
April	\)14,000
May	\(8,000
June	\)6,000
July	\(22,000
August	\)26,000
September	\(29,000
October	\)34,000
November	\(42,000
December	\)24,000
Total annual sales	\(264,000

Short Answer

Step by step solution

Information given in the question

Net income calculation

Dividend pay-out calculation

Addition made to retained earnings

External funds needed

One App. One Place for Learning.

Most popular questions from this chapter

Recommended explanations on Business Studies Textbooks

Introduction to Business

Corporate Finance

Business Operations

Organizational Behavior

Business Development

Change Management

Study anywhere. Anytime. Across all devices.