Question

Muscat Video Products’ sales are expected to increase from OMR (8) million in 2019 to OMR (10) million in 2020. Asset turnover generated in the 2019 of (2) times. Muscat Company is already at full capacity, so its assets must grow at the same rate as projected sales.

At the end of 2019, current liabilities were OMR (2) million, the net profit was OMR (32) thousand, and the dividend payout ratio was 30%. Suppose the net profit margin and dividend payout ratio will hold the same percentage in 2020.

Is Muscat company needs fund from external or internal to finance the new sales in 2020? And why. (Note: - Kindly mention the equations that are related)

Using the following:

AFN = Additional Fund Need

AFN= ΔS [(TA/S0) – (TCL/S0)] – [NPM(S1)(1- D%)]                                   

ΔS = Expected Sales(S1) – Current Sales (S0 )

TA = Total Asset.

TA = TL + TE

TCL =Total Current Liabilities.

TL = TCL + Long-term Liabilities

NPM = Net Profit Margin.

NPM = NI / Sales

D% = Dividend payout Ratio.

FLM = 1/(1-DR%)

TA = TL + TE

Answer 1

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