Chapter 3: Q3BP (page 184)

Tobin Supplies Company expects sales next year to be $500,000. Inventory and accounts receivable will increase $90,000 to accommodate this sales level. The company has a steady profit margin of 12 percent with a 40 percent dividend pay-out. How much external financing will Tobin Supplies Company have to seek? Assume there is no increase in liabilities other than that which will occur with the external financing.

Expert verified

The external financing that the company has to seek is $54,000.

Step by step solution

The following information is provided:

Expected sales = $500,000

Expected increase in inventory and accounts receivables = $90,000

Profit margin = 12%

Dividend pay-out = 40%

$Net income = Expected sales \times Profit margin = $ 500, 00 \times 12 % = $ 60, 000$

$Dividend pay out = Net income \times Dividend pay - out percentage = $ 60, 000 \times 40 % = $ 24, 000$

$Addition to retained earnings = Net income - Dividend pay - out = $ 60, 000 - $ 24, 000 = $ 36, 000$

The external fund needed is $54,000.

$External funds needed = Increase in assets - Addition to retained earnings = $ 90, 000 - $ 36, 000 = $ 54, 000$

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