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Chapter 3: Q4BP (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 $3,750,000.

Netincome=Expectedsales脳Profitmargin=$2,500,000脳15%=$3,750,000

03

Dividend pay-out calculation

The dividend pay-out is $131,250.

Dividendpayout=Netincome脳Dividendpay-outpercentage=$3,750,000脳35%=$131,250

04

 Addition made to retained earnings

The addition to retained earnings is $243,750.

Additiontoretainedearnings=Netincome-Dividendpay-out=$375,000-$131,000=$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

Neon Light Company of Kansas City ships lamps and lighting appliances throughout the country. Ms. Neon has determined that through the establishment of local collection centers around the country, she can speed up the collection of payments by three days. Furthermore, the cash management department of her bank has indicated to her that she can defer her payments on her accounts by one-half day without affecting suppliers. The bank has a remote disbursement center in Florida.

a. If Neon Light Company has \(2.25 million per day in collections and \)1.05 million per day in disbursements, how many dollars will the cash management system free up?

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