Please show work. Thank you!!! The 2004 the balance sheet for American Pulp and
ID: 2733912 • Letter: P
Question
Please show work. Thank you!!!
The 2004 the balance sheet for American Pulp and Paper is shown below (in millions of dollars):
Cash $3.0 Accounts payable 2.0
Accounts receivable $3.0 Notes payable 1.5
Inventory $5.0
Current Assets $11.0 Current liabilities $3.5
Fixed Assets 3.0 Long-term debt 3.0
Common equity 7.5
Total Assets $14.0 Total liabilities and equity $14.0
In 2004, sales were $60 million. In 2005, management believes that sales will increase by 20 percent to a total of $72 million. The profit margin is expected to be 5 percent, and the dividend payment ratio is targeted at 40 percent. No excess capacity exists. What is the additional financing requirement (in millions) for 2005 using the formula method?
Explanation / Answer
Additional sales = $72 million - $60 million = $12 million
Net income = $12 million × 5% = $0.6 million
Dividend payout ratio = Dividends / Net income
0.4 = Dividends / $0.6 million
Dividends = $0.24 million
Additional financing $0.24 millions