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Antivirus Inc. expects its sales next year to be $3,600,000. Inventory and accounts receivable will increase...

Antivirus Inc. expects its sales next year to be $3,600,000. Inventory and accounts receivable will increase by $590,000 to accommodate this sales level. The company has a steady profit margin of 12 percent with a 30 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.

What are the external funds needed _______________

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Answer #1

Next Year:

Sales = $3,600,000
Profit Margin = 12%
Dividend Payout Ratio = 30%

Net Income = Sales * Profit Margin
Net Income = $3,600,000 * 12%
Net Income = $432,000

Addition to Retained Earnings = Net Income * (1 - Dividend Payout Ratio)
Addition to Retained Earnings = $432,000 * (1 - 0.30)
Addition to Retained Earnings = $302,400

Increase in Assets = $590,000

External Funds Needed = Increase in Assets - Addition to Retained Earnings
External Funds Needed = $590,000 - $302,400
External Funds Needed = $287,600

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