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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

01

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%

02

Net income calculation

The net income is $375,000.

Netincome=Expectedsales脳Profitmargins=$2,500,000脳15%=$375,000

03

Dividend pay-out calculation

The dividend pay-out is $131,250.

Dividendpayout=Netincome脳Dividendpayoutpercentage=$375,000脳35%=$131,250

04

Addition made to retained earnings

The addition to retained earnings is $243,750.

Additiontoretainedearnings=Netincome-Dividendpayout=$375,000-$131,250=$243,750

05

External funds needed

The external fund needed is $236,250.

Externalfundsneeded=Increaseinassets-Additiontoretainedearnings=$480,000-$243,750=$236,250

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Most popular questions from this chapter

By using long-term financing to finance part of temporary current assets, a firm may have less risk but lower returns than a firm with a normal financing plan. Explain the significance of this statement.

Esquire Products Inc. expects the following monthly sales:

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

Cash sales are 40 percent in a given month, with the remainder going into accounts receivable. All receivables are collected in the month following the sale. Esquire sells all of its goods for \)2 each and produces them for \(1 each. Esquire uses level production, and average monthly production is equal to annual production divided by 12.

d. Construct a cash budget for January through December using the cash receipts schedule from part b and the cash payments schedule from part c. The beginning cash balance is \)3,000, which is also the minimum desired.

Discuss the relative use of credit between large and small firms. Which group is generally in the net creditor position, and why?

Guardian Inc. is trying to develop an asset financing plan. The firm has \(400,000 in temporary current assets and \)300,000 in permanent current assets. Guardian also has \(500,000 in fixed assets. Assume a tax rate of 40 percent.

b. Given that Guardian鈥檚 earnings before interest and taxes are \)200,000, calculate earnings after taxes for each of your alternatives.

In the second year, Fisk Corporation finds that it can reduce ordering costs to \(2 per order but that carrying costs stay the same at \)1.60 per unit. Also, volume remains at 49,000 units per year.

c. What will the average inventory be?
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