Antivirus Inc. expects its sales next year to be $2,100,000. Inventory and accou
ID: 2739070 • Letter: A
Question
Antivirus Inc. expects its sales next year to be $2,100,000. Inventory and accounts receivable will increase by $440,000 to accommodate this sales level. The company has a steady profit margin of 8 percent with a 15 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.
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.
Explanation / Answer
Expected Sales in next year = $ 2,100,000 ;
Increase in Inventory and accounts receivables = $ 440,000
Increase in Liabilities = 0
Profit Margin = 8%
Dividend Pay out = 15% that is Retention rate = 85%
The formula: Additional funds needed = Increase in assets - Increase in liabilities - Increase in retained earnings
Increase in assets - Increase in liabilities - Increase in sales * Profit Margin *retention rate
$ 440,000 - $ 0 - $ 2,100,000 * 8% * 85%
$ 440,000 - $ 0 - $ 142,800
$ 297,200
Therefore, External funds needed = $ 297,200