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Q1: Current sales are $360,000, current assets $80,000, accounts payable $15,000, accruals $5,000, net profit margin...

Q1:

Current sales are $360,000, current assets $80,000, accounts payable $15,000, accruals $5,000, net profit margin of 5% with a 50% dividend payout. If I expect sales to increase by 20% and no fixed assets are needed, what is my external funds requirement? Take to 4 decimal places when calculating.

Q2:

Current sales are $360,000, current assets $80,000, accounts payable $15,000, accruals $5,000, net profit margin of 5% with a 50% dividend payout. If I expect sales to increase by 20% and am at capacity so my fixed assets of $80,000 will also need to be increased by the 20%, now what is my external funds requirement? Take to 4 decimal places when calculating.

Expert Solution

Answer to Question 1:

Current Sales = $360,000
Growth Rate = 20%

Current Liabilities = Accounts Payable + Accruals
Current Liabilities = $15,000 + $5,000
Current Liabilities = $20,000

Expected Sales = Current Sales * (1 + Growth Rate)
Expected Sales = $360,000 * 1.20
Expected Sales = $432,000

Retention Ratio = 100% - Payout Ratio
Retention Ratio = 100% - 50%
Retention Ratio = 50%

Expected Addition to Retained Earnings = Expected Sales * Profit Margin * Retention Ratio
Expected Addition to Retained Earnings = $432,000 * 5% * 50%
Expected Addition to Retained Earnings = $10,800

Increase in Current Assets = Current Assets * Growth Rate
Increase in Current Assets = $80,000 * 20%
Increase in Current Assets = $16,000

Increase in Current Liabilities = Current Liabilities * Growth Rate
Increase in Current Liabilities = $20,000 * 20%
Increase in Current Liabilities = $4,000

External Funds Requirement = Increase in Current Assets - Increase in Current Liabilities - Expected Addition to Retained Earnings
External Funds Requirement = $16,000 - $4,000 - $10,800
External Funds Requirement = $1,200

Answer to Question 2:

Current Sales = $360,000
Growth Rate = 20%

Current Liabilities = Accounts Payable + Accruals
Current Liabilities = $15,000 + $5,000
Current Liabilities = $20,000

Expected Sales = Current Sales * (1 + Growth Rate)
Expected Sales = $360,000 * 1.20
Expected Sales = $432,000

Retention Ratio = 100% - Payout Ratio
Retention Ratio = 100% - 50%
Retention Ratio = 50%

Expected Addition to Retained Earnings = Expected Sales * Profit Margin * Retention Ratio
Expected Addition to Retained Earnings = $432,000 * 5% * 50%
Expected Addition to Retained Earnings = $10,800

Increase in Current Assets = Current Assets * Growth Rate
Increase in Current Assets = $80,000 * 20%
Increase in Current Assets = $16,000

Increase in Fixed Assets = Fixed Assets * Growth Rate
Increase in Fixed Assets = $80,000 * 20%
Increase in Fixed Assets = $16,000

Increase in Current Liabilities = Current Liabilities * Growth Rate
Increase in Current Liabilities = $20,000 * 20%
Increase in Current Liabilities = $4,000

External Funds Requirement = Increase in Current Assets + Increase in Fixed Assets - Increase in Current Liabilities - Expected Addition to Retained Earnings
External Funds Requirement = $16,000 + $16,000 - $4,000 - $10,800
External Funds Requirement = $17,200

jeff jeffy answered 1 year ago

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